EU Council adopts regulation for sustainable finance

On 5 October 2023, The European Council adopted the Green Bond regulation, creating The European Green Bond Standard (EU-GBS) and setting new measures to reduce greenwashing.

Establishing this standard was an action in the Commission’s 2018 action plan on financing sustainable growth and is part of the European green deal, and it is based on the recommendations of the Technical Expert Group on Sustainable Finance.

The regulation sets out consistent criteria for bond issuers seeking to label their environmentally sustainable bonds as 'European green bonds' or 'EuGB.' These bonds play a crucial role in financing green technologies, energy efficiency, resource efficiency, sustainable transport infrastructure, and research infrastructure. European green bonds will adhere to the EU taxonomy for sustainable activities, ensuring global accessibility to investors.

The regulation represents a significant stride in implementing the EU's strategy for financing sustainable growth and transitioning to a climate-neutral, resource-efficient economy. The standard aims to enhance uniformity and comparability in the green bond market, offering benefits to both issuers and investors. Issuers can showcase their commitment to funding genuine green projects aligned with the EU taxonomy, boosting investor confidence by mitigating the risks associated with greenwashing and encouraging capital flows into environmentally sustainable initiatives.

Definition of eligible green projects and development of a green bond framework

Issuers will have to set guidelines and criteria specifically designed to fund environmentally sustainable projects. They will be required to explain how their strategy aligns with the EU’s environmental objectives, and must provide details on the most important aspects of their use of proceeds, the processes they employ, and their reporting on green bonds. Beyond these mandatory requirements, issuers should explore robust means of substantiating the congruence of their strategy with the EU's environmental objectives, encompassing areas such as climate change mitigation, climate change adaptation, sustainable water and marine resource management, transition to a circular economy, recycling, waste prevention, pollution control, and the preservation of healthy ecosystems. Issuers should ensure that green bonds under the EU Green Bond Standard have pertinent environmental and social objectives integrated into their overall strategy.

All proceeds from European green bonds must be invested in economic activities aligning with the EU taxonomy for sustainable activities, as long as the sectors involved are already covered by it. A flexibility pocket of 15% is introduced for sectors not yet covered by the EU taxonomy and specific activities. This flexibility aims to ensure the immediate applicability of the European green bond standard. The use and necessity of this flexibility pocket will be reassessed as Europe progresses toward climate neutrality, considering the growing availability of attractive and green investment opportunities in the coming years.

Anticipated outcomes include heightened investor interest in this asset class, leading to an expansion of the green bond market. The EU Green Bond Standard, being more stringent than other benchmarks, offers an opportunity to introduce more resilient green bonds. This development is advantageous for investors and financiers as taxonomy-aligned green bonds are expected to facilitate the achievement of their Environmental, Social, and Governance (ESG) targets, offering valuable input for ESG reporting.

Mandatory reporting

Issuers will have to monitor the implementation of the green projects and provide reports on the use of proceeds and the expected environmental sustainability impacts. Issuers will have to develop performance indicators and project evaluation metrics for monitoring and reporting on the financial, environmental, and social outcomes of projects.

Mandatory verification

Green bonds must be subject to an approved prospectus in order to obtain the European green bond designation. The regulation establishes a registration system and supervisory framework for external reviewers of European green bonds. To address greenwashing concerns in the broader green bonds market, the regulation includes voluntary disclosure requirements for other environmentally sustainable bonds and sustainability-linked bonds issued in the EU.

KPMG is one of the most well-known brands amongst investors with a reputation for rigor, integrity and transparency. We have credibility as a developer of green bond criteria and as a provider of third-party assurance.

Our network of experts has supported over 40 green and social bonds issued in 15 countries. We have in-depth understanding of green bond guidelines and standards as well as knowledge of local regulations. Our expertise within non-financial assurance and financial audit means that we can deliver integrated external reviews on financial reports, sustainability reports and green bonds.