The European Green Bond Regulation

Author: dr. Veronika Bakonyi

With the adoption of the European Green Bond Regulation, the EU legislator has set standards for environmentally sustainable bonds in the context of the transition to a climate-neutral and sustainable economy.

Issuers wishing to offer their bonds to investors under the designation "European Green Bond" or "EuGB" will be able to do so from the end of next year, in accordance with the European Green Bond Regulation. The regulation will also regulate the external review of these bonds and set out optional disclosure documents for the issuance of environmentally sustainable or sustainability related bonds.

The rules of the European Green Bond Regulation will apply from 21 December 2024, but it's never too early to start preparing.

In fact, the Regulation creates a new asset class within bonds by regulating the European Green Bond; the main rules for issuing this type of bond are summarised below.

For what purpose can an issuer use the resources coming from the issuance of a European Green Bond?

For the bond to qualify as a European Green Bond, the proceeds from the issuance must comply with the Regulation. The proceeds of the European Green Bond must be used to finance economic activities that are environmentally sustainable and therefore in line with the environmental objectives set out in the taxonomy regulation or contribute to the transformation of the issuer's activities to become environmentally sustainable.

All the proceeds from the European Green Bond can be used by the issuer:

  1. to finance fixed tangible or intangible assets which are not financial assets, provided that they are linked to economic activities which meet the taxonomic requirements;
  2. to finance capital expenditure in accordance with the conditions laid down in the Regulation;
  3. to financeoperating expenditure in accordance with the conditions laid down in the Regulation, incurred in the three years preceding the issue of the bond,
  4. to finance financial assets created no later than 5 years after the bond issuance;
  5. to finance household assets and expenditure.

Issuers will have the right to deduct costs directly related to the issue, such as costs for financial intermediaries, advisory costs, legal costs, rating costs and external review costs, from the proceeds of the bond.

The Regulation also allows for a portfolio approach in relation to the use of proceeds from bond issues. An issuer that has one or more European Green Bonds on the liability side of its balance sheet and is unable to identify the specific assets on its balance sheet for each issue on which it will use the proceeds of that bond may allocate the proceeds of the bond issue to a portfolio (of course, the assets in the portfolio must still comply with the conditions of the taxonomy regulation).

The Regulation will also allow, to a limited extent, the possibility for the issuer to allocate part of the proceeds of the bond issue - up to 15% - to an economic activity that meets the requirements of the taxonomy regulation but for which the technical criteria for assessment have not yet entered into force at the time of the bond issuance.

What information obligations apply to the issuer prior to the bond issuance?

In the future, only bonds that comply with the Prospectus Regulation and the rules of the Green Bond Regulation may be issued under the name "European Green Bond" or "EuGB". The publication of the prospectus is subject to the approval by the supervisory authority.

In addition to the prospectus, the issuer must also prepare a European Green Bond factsheet prior to the issue. In the factsheet, the issuer shall, inter alia, indicate how and to what extent the proceeds of the bond are expected to contribute to the issuer's key performance indicators of assets, revenue, capital expenditure and operating costs, as appropriate to the issuer's taxonomy, and describe the intended use of the proceeds, its process and timing. The issuer must publish the factsheet on its website and it must be available for 12 months from the date of issuance. Prior to publication, the factsheet must be reviewed by an external reviewer and only with his positive opinion will it be published. Supervisory approval is not required for the publication of the factsheet.

The issuer must prepare and publish a capital expenditure plan, if the bond proceeds are used for capital expenditure or to finance operating expenses (CapEx, OpEx) and are related to an economic activity that will meet the taxonomy requirements. The capital expenditure plan shall specify the timeframe, prior to the maturity of the European Green Bond, within which all capital and operating expenditures financed by the European Green Bond must be taxonomy compliant. An assessment of this should also be obtained from an external reviewer.

What information obligations apply to the issuer following the bond issuance?

The issuer will prepare and publish an annual allocation report after the bond issue until the funds are used. In the allocation report, the issuer shall describe the use of the proceeds of the issue (e.g. projects, economic activities, amount of proceeds used from the bond issue, etc.). The allocation report shall be reviewed by the external reviewer. The issuer is exempted from the obligation to prepare an allocation report if there has been no change in the allocation of the portfolio of assets during the relevant period and no asset in the portfolio has been changed or the allocation of any asset in the portfolio has been changed from the period covered by the previous allocation report.

The issuer is required to prepare and publish an impact report at least once during the term of the bond, after the total use of the bond proceeds. In the impact report, the issuer shall describe the environmental impact of the use of the proceeds of the bond, including how the bond has contributed to the issuer's wider environmental strategy and the positive and negative environmental impacts of the use of the bond. The impact report should clearly set out the metrics, methodologies and assumptions used in the impact assessment.

The Green Bond Regulation helps to inform investors and to compare the different green bonds available on the market based on proper information. By setting standards and regulating external review, the Regulation also contributes to the elimination of greenwashing from the market.