On November 30th, 2023, the Official Journal of the EU published the new Regulation (EU) 2023/2631 (“Regulation”), which establishes a comprehensive framework for the issuance and regulation of bonds aiming to be labelled “green” in the European Market. The Regulation entered into force 20 days after publication and will apply as of December 21st, 2024.
The Regulation aims to enhance market integrity and investor protection by requiring prospective European green bond issuers:
to commit to a certain utilization of the proceeds;
- to provide various levels of reporting and disclosure.
The ultimate purpose is to prevent greenwashing in accordance with existing worldwide-accepted standards, in particulars those set out by the ICMA in its Green Bond Principles.
As to proceeds utilization, article 4 of the Regulation provides for a “gradual approach” (referred to a single issuance) and a “portfolio approach” (referred to multiple issuances). In the gradual approach, all proceeds must be allocated to fixed non-financial assets, capital expenditure, and operating expenditures under the taxonomy requirements. In the portfolio approach, the proceeds may be assigned to a portfolio of fixed assets or financial assets in accordance with the taxonomy requirements, provided that the total value of the assets in the issuer’s portfolio must exceed the total value of its portfolio of outstanding European green bonds.
With respect to reporting requirements, issuers are obligated, before launching a European green bond, to draft a factsheet in accordance with the form attached to the Regulation, where the estimated timeline for full allocation of proceeds and the project selection process are set out. An annual report on the allocation of proceeds must be published during the life of the bond, as well as a final impact assessment report upon completion of the project. Both the pre-issuance as the post-issuance reporting are subject to independent external positive review.
In addition to aligning the definition of “sustainable activities” with the EU Taxonomy Regulation, the new Regulation expands the scope of green bonds to include issuance by states, regions, and municipalities, allowing proceeds to be allocated to various sustainable expenditures.
Article 5 of the Regulation includes a 15% flexibility threshold, which allows issuers of green bonds to allocate up to 15% of the total proceeds to assets that are not fully aligned with the EU Taxonomy criteria for sustainable activities. This provision offers a degree of flexibility to accommodate projects that may not yet meet all the criteria for green investment, but are recognized as environmentally beneficial by the market.
The flexibility threshold concerns in particular:
projects that are widely recognized as green by the market but do not yet have specific technical screening criteria;
- investments in activities supported by international guidelines and agreements, such as climate finance contributions under the United Nations Framework Convention on Climate Change (“UNFCCC”) or international development aid.
Overall, the 15% flexibility threshold provides issuers with some leeway to include projects that contribute to environmental objectives, but may not fit strict taxonomy criteria, thereby promoting innovation and adaptation in the green bond market.
