Brussels regulates green bonds to promote debt issuances with environmental criteria

The so-called green bonds or debt issues with environmental criteria already exceed 250,000 million euros per year in the world market, but still represent just over 3% of the placements made in total. The European Commission wants to give a boost to this type of debt with the approval, for the first time, of a community regulation that sets the conditions for being able to label the issuance of a bond as green. Brussels is confident that the stimulus of green bonds will help finance the investments needed to achieve the emission reduction targets by 2030, which require the annual mobilisation of some €330 billion.

The new rules, included in a draft regulation that the European Commission plans to approve on Tuesday, set the obligations that must be assumed by the issuers of the debt labeled as “European green bond”. The Regulation, to which EL PAÍS has had access, also establishes a system of registration and supervision of companies acting as external auditors to verify the validity of a label that is anticipated to grow demand and with yields higher than those of traditional bonds.

The draft legislation, which must now be dealt with by the Council and the European Parliament, provides for significant penalties, of up to 200,000 euros plus periodic fines, for verifiers who, deliberately or negligently, fail to comply with their obligations of rigour and neutrality. The Commission thus wants to avoid the risk of façade environmentalism for companies that obtain green financing on the market but allocate capital to dubious sustainable activities.

Brussels considers, precisely, that the growth of green bonds is still slowed by factors such as investors’ distrust of a relatively subjective label and by the need for issuers to seek certification from several external auditors to try to offer certain guarantees.

In the most energy-intensive industrial sectors (from cement to paper mills to steel mills), green bond issuances are very scarce because companies fear being accused of trying to camouflage the environmental impact of their activities or exploiting a label they do not deserve.

Green Investment Standard

The Commission hopes that the new regulation will clear up doubts and allow all investors to purchase green bonds with the guarantee that their money will be used to finance projects compatible with the EU’s environmental objectives. Brussels believes that the new standard will also make it easier for issuers to lower verification costs and for many more companies to venture into the market with the endorsement of the label created in the new regulation: EuGB, acronym in English of the European Green Bond (European Green Bond).

The regulation obliges to dedicate all the capital obtained from the issuance of green debt “to finance economic activities that are environmentally sustainable (…) or that contribute to the transformation of activities to be environmentally sustainable”, according to the explanatory text that precedes the standard.

Acceptable activities are set by the taxonomy or classification being developed by the EU to identify the sectors with the greatest potential to contribute to environmental objectives. Among the first designated are energy, transport, manufacturing and buildings. Brussels estimates that the ranking already covers 40% of listed companies in these sectors, which are attributed 80% of direct CO₂ emissions in Europe.

The Commission expects the combination of the taxonomy and the green bond regulation to facilitate the energy transition in the most emission-intensive sectors, which will need significant funding to adapt to the new levels of reduction required. The EU has raised the 2030 reduction target from 40% to 55%. And it has set itself the goal of zero emissions by 2050. Brussels estimates that during this decade alone an investment of more than €330 billion a year will be required to finance a large-scale industrial and social transformation.

Cheaper emissions

The new regulation, according to the Commission, will make it easier to obtain capital on the markets to finance the transition. The availability of a green label of a European nature will make the placement of this debt cheaper, according to the Community body, because it will be enough for the issuers to have a single favorable external audit. Currently, according to Brussels, companies that bet on green debt seek the endorsement of several external verifiers to convince investors who observe with certain reluctance the supposedly green emissions.

Even without a common European standard, the market has developed at a rapid pace in recent years. From the 600 million euros of the first green bond issue in Europe in 2007, carried out by the European Investment Bank, it went to 53,800 million in 2017. The figure doubled two years later to more than 107,000 million. And even in 2020, a year of lower activity as a result of the covid-19 pandemic, a new record was broken and 130,000 million euros were touched.

The EU has already become the global market leader with 49% of total emissions, which in 2020 stood at 252,000 million. Brussels is convinced that it will strengthen that leadership with the recovery fund against the pandemic, with which it will issue debt for a total value of 800,000 million euros. 30% of these issues will be green, so the EU alone will double the current volume of the global debt market for sustainable projects. The Commission believes that if the current pace is maintained, green emissions will exceed €830 billion globally by 2023.

Source: The Country