Article

The EU goes for gold with its Green Bond Regulation

Published Date
Dec 19 2024
When political agreement on the EU Green Bond Regulation (the EuGB Regulation) was reached in February 2023, rapporteur Paul Tang was quoted as saying:

This Regulation creates a gold standard that green bonds can aspire to. It ensures that the money raised must go to green activities and that bonds are vetted by professional and independent third party reviewers. This is a world apart from current market standards.

The application date for the EuGB Regulation of December 21, 2024 is nearly upon us. In this article we consider key requirements for an issuer who wishes to use the voluntary EU Green Bond (EuGB) label, including the interplay with the EU Prospectus Regulation (PR), take a brief look at the alternative scheme of optional disclosures provided for by the EuGB Regulation and consider briefly which issuers may be the first to use the EuGB label.

An issuer wanting to use the EuGB label for a green use of proceeds bond will need to: (i) comply with the allocation requirements; (ii) provide pre- and post-issuance disclosure; (iii) have that disclosure externally reviewed; and (iv) be willing to submit to the oversight of the competent authority of its home Member State under the PR. 

An issuer does have alternatives. It has the option under the EuGB Regulation to provide sustainability disclosures for (i) use of proceeds bonds not using the EuGB label but marketed as environmentally sustainable or (ii) sustainability-linked bonds. Importantly, an issuer will also still be able to continue to follow the ICMA Principles instead, should they prefer.

European green bonds (EuGBs)

To use the label an issuer will need a PR compliant prospectus or be an exempt EU Sovereign issuer.

The prospectus will need to specifically designate the bonds as "European green bonds" or "EuGB" throughout the prospectus and the use of proceeds section will need to include a statement that the bonds are issued in accordance with the EuGB Regulation.

Allocation of proceeds

Under the EuGB label, there are two ways in which proceeds can be allocated, the gradual or the portfolio approach. Under both approaches, before the maturity of the EuGB, the proceeds (from which issuance costs can be deducted - defined to include costs incurred for legal counsel, rating, external review, underwriting and placement (including fees)) need to have been fully allocated to certain categories.

Under the gradual approach, before maturity of the EuGB, the proceeds of such a bond shall be allocated in full to one or more of the following categories:

  • Fixed assets that are not financial assets.
  • Capital expenditures.
  • Operating expenditures (that were incurred no more than three years before the issuance of the EuGB).
  • Financial assets (subject to certain conditions).
  • Assets and expenditures of households.

Alternatively, under the portfolio approach, issuers could allocate proceeds from a portfolio of one or more outstanding EuGB to a portfolio of fixed assets or financial assets with the value of the latter exceeding the value of the portfolio of outstanding EuGB.

Under both approaches, the proceeds must be allocated according to the criteria set out in Article 3 of the EU Taxonomy Regulation (the Taxonomy) including:

  • Contributing substantially to one or more of the environmental objectives set out in Article 9 of the Taxonomy.
  • Doing no significant harm to any other environmental objectives.
  • Complying with minimum safeguards.
  • Complying with technical screening criteria (the TSC).

There are special requirements in relation to Sovereigns and also in relation to securitisations. For more information on these areas, please speak to your usual A&O Shearman contacts. You may also want to listen to our Market Horizon’s podcast entitled, “What does the EU Green Bond Regulation mean for securitisation?”

If capital expenditures or operating expenditures will meet the Taxonomy requirements in the future, an issuer will need to publish a CapEx plan specifying a deadline by when all expenditures funded by the EuGB shall be Taxonomy aligned (which must be before maturity of the bonds). Crucially, a summary of the CapEx plan will need to be included in the prospectus, bringing with it potential prospectus liability.

Bond proceeds must be allocated in alignment with TSC applicable at the time the bond is issued. The EuGB Regulation does, however, introduce some flexibility in relation to the gradual approach. Up to 15% of the proceeds can be allocated to activities that comply with the Taxonomy requirements, with the exception of the TSC, where there are no relevant TSC in force on issue, as long as the activities “Do No Significant Harm” to any other environmental objectives.

If the TSC are amended after issuance, (i) proceeds that are not yet allocated or (ii) proceeds covered by a CapEx plan that have not yet met the Taxonomy requirements, will need to be allocated in alignment with the amended TSC within seven years after their entry into application. If proceeds covered by a CapEx plan are at risk of not being aligned, the issuer must publish and have reviewed a remediation plan for the purposes of aligning to the amended TSC.

If a portfolio approach is followed, only fixed assets and financial assets where the underlying economic activity is aligned with TSC which were applicable at some point during the seven years prior to the relevant allocation report can be included in the portfolio.

image of the EuGB label disclosure timeline

Pre-issuance Disclosure

Prior to issuance, issuers will need to draw up a pre-issuance factsheet and obtain a pre-issuance external review of it. This factsheet includes some forward looking requirements such as disclosure about how the bonds are expected to contribute to the broader environmental strategy of the issuer and (for companies that will be required to sustainability report under the Corporate Sustainability and Reporting Directive (CSRD)) how they are expected to contribute to the issuer’s Taxonomy aligned assets, turnover, capital expenditures and operating expenditure. The factsheet and external review of the factsheet will need to be published on the issuer's website before the issuance of the bond and made available there until at least 12 months after the maturity of the bond. The relevant competent authority and ESMA will also need to be notified of the publication. An issuer will need to consider these requirements in advance in order to ensure they do not cause any timing concerns before the launch of a transaction, especially for trades under a programme. We are aware that competent authorities are considering EuGB issuance in the context of programmes.

Interplay with the EU Prospectus Regulation

The factsheet will count as regulated information for the purposes of the prospectus incorporation by reference provisions and so could be incorporated by reference into the prospectus. Alternatively, relevant information could be set out in the prospectus. An issuer will need to be comfortable that any information omitted from the prospectus isn’t deemed necessary for investors from an investment decision perspective.

It is uncertain how this may work in relation to trades under programmes. Should an issuer want to include information from the factsheet in its base prospectus, it will need to prepare a supplement to incorporate the information by reference or set it out. Alternatively, relevant information could be included in the trade Final Terms, if it is deemed Category C information, such as information concerning use of proceeds that was not known at the time the base prospectus was approved.

As part of the EU’s Listing Act package, an Amending Regulation entered into force on December 4, 2024, introducing various changes to the PR. See our article “Prospectus regime changes in the EU and U.K. – a debt capital markets outlook” for more information.

Amended Article 13(1a) of the PR, which will apply from June 5, 2026, indicates that a prospectus for an EuGB will need to incorporate by reference relevant information from an issuer's EuGB factsheet. In addition, the ESMA Consultation suggests that all factsheet information may become Category C information, allowing it to be included in Final Terms, unless it was known about at the time of prospectus approval.

The Amending Regulation gives the Commission the power to introduce a disclosure annex into the PR Delegated Regulation to be followed for debt securities advertised as taking into account environmental, social and governance (ESG) factors or pursuing ESG objectives. ESMA published a consultation on October 28, 2024 on draft technical advice concerning the PR (the ESMA Consultation) including a draft of this annex, which would operate as a building block to be followed in addition to the non-equity annexes when drawing up a prospectus. It builds on ESMA's public statement on sustainability disclosures from summer 2023. It is clear from the ESMA Consultation that consideration is being given to the interplay between the PR and the EuGB Regulation, both in terms of the full disclosure package for an EuGB and how the EuGB information can be used to meet relevant prospectus requirements, including in the context of programmes.

Post-issuance disclosure

Issuers will need to report annually on the allocation of proceeds, until the proceeds have been fully allocated. The allocation report drawn up after full allocation of proceeds will need to be externally reviewed. However, if following the portfolio approach (mentioned under “Allocation of proceeds” above), an external review will be needed on every allocation report (unless nothing has changed in the portfolio).

An impact report will also be required after full allocation and once during the life of the bond. These may be reviewed but do not have to be.

External reviews

The EuGB Regulation requires external reviews of the pre-issuance factsheet and allocation report after full allocation of proceeds. It also introduces a requirement that external reviewers of EuGBs will need to register with ESMA and comply with certain conditions set out in the EuGB Regulation. It provides a regime for third country external reviewers (of registration, recognition and endorsement). There is a transitional period which applies from  December 21, 2024 until June 21, 2026. ESMA is due to publish a list on its website of the firms that have notified it and provided the necessary information and can therefore provide services as EuGB External Reviewers during this transitional period.

Competent Authority oversight

All of these disclosure documents, i.e. the factsheet and associated external review, the allocation reports (and reviews), CapEx plans, impact report (and any external review), as well as a link to the prospectus and any amendments to these documents will need to be published on the issuer's website until at least 12 months after maturity of the bonds. Issuers will also need to inform the competent authority of their PR home Member State and ESMA of the publication of these documents. ESMA have created a questionnaire which can be completed online via their website to notify them of the publication of one or more of the documents outlined above. The competent authority of the home Member State will have supervisory powers over compliance with provisions around the factsheet, the allocation reports and the impact report. These include power to suspend trading in the EuGB and there may be a concern that a failure to meet any of the requirements that apply in relation to use of the EuGB label may risk imposition of such measures, although it isn’t yet clear exactly how the supervision will be conducted.

Optional disclosures for issuers of bonds marketed as environmentally sustainable or sustainability-linked bonds

The EuGB Regulation provides an alternative, optional regime of pre and post issuance disclosures for bonds marketed as environmentally sustainable in the Union and sustainability-linked bonds (SLBs).

The Commission is mandated to publish guidelines and adopt delegated acts with a view to establishing content, methodologies and presentation, as well as voluntary templates, for these disclosures. 

The pre-issuance templates will include information on whether the issuer intends to use an external reviewer and templates for post-issuance disclosures (which an issuer may choose to disclose). The templates will also include at least the following elements:

  • How the bond is intended to contribute to achieving the issuer's transition plans (where published, which is required if in scope of the CSRD).
  • For Use of Proceeds bonds, how the bond is expected to contribute to the issuer's taxonomy-aligned turnover, capital expenditure and operating expenditure (again, whether this is required is linked to sustainability reporting required by CSRD) or for SLBs, where relevant, the manner in which the bond is linked to the issuer’s taxonomy-aligned turnover, capital expenditure and operating expenditure.
  • For Use of Proceeds bonds, the minimum proportion of proceeds to be used on taxonomy aligned activities.
  • For SLBs, the rationale, level of ambition, materiality and calculation methodology of the key performance indicators and a description of the bond structure, including the coupon adjustment mechanism.

Again, amended Article 13(1a) of the PR, which will apply from June 5, 2026, indicates that a prospectus will need to include the relevant optional disclosures, where the issuer has chosen to make them.

If an issuer chooses to disclose post-issuance information, the competent authority of its PR home Member State shall supervise the post-issuance disclosure it makes.

On December 17, 2024, the Commission published a draft delegated Regulation on establishing the content, methodologies and presentation of the information to be voluntarily disclosed in the templates for periodic post-issuance information disclosures. Feedback on this draft can be provided until January 28, 2025. The minimum information to be covered in the templates is set in the EuGB Regulation and is similar to the provisions outlined above for the pre-issuance information. 

As at December 19, 2024 the pre-issuance templates have not yet been published.

The future?

It remains to be seen how many issuers adopt the EuGB label given the concerns around the usability of the Taxonomy and the requirements of the EuGB Regulation over and above current market practice. It may be that, EU sovereigns, supranationals and agencies, together with pure-play green companies, are the first to use the EuGB label. However, the EuGB label may become increasingly popular as more issuers get used to the growing environment of sustainability reporting.

The review clause states that the Commission will draft a report within five years, assessing among other things, the uptake of the EuGB label and of the optional pre- and post-issuance disclosure regime. Such report will be accompanied, where appropriate, with a legislative proposal including as regards these optional disclosures. There is also a mandate for the Commission to publish a report within three years on the need to regulate SLBs.

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