Green bonds with an "EU licence": New regulation strengthens credibility

Companies can use green bonds to finance ecological projects and demonstrate their commitment to sustainability at the same time. A special feature of these "green bonds" is their so-called "greenium" - a term based on "premium", which is intended to emphasise a price advantage over an ordinary bond. Due to their popularity with investors, green bonds can sometimes be placed at lower interest rates and are oversubscribed more quickly. With the new EU regulation and the protected designation "EU Green Bond" (EuGB), a further boost for this form of financing is to be expected.

Green bonds are bonds whose purpose must be clearly assigned to "green" projects. Green bonds have developed rapidly in recent years; Germany has become the largest market in Europe.

Studies show that green bonds can be successfully issued with interest rates that are up to 19 basis points lower. The greenium effect is therefore particularly pronounced for bonds that are categorised as particularly credible in terms of their sustainability benefits as a result of stringent checks.

Further advantages:

• Companies that issue green bonds are making a clear commitment to sustainable behaviour. This can lead to an improved corporate reputation.
• By issuing green bonds, companies can reach a new, environmentally aware investor base that is specifically looking for opportunities to invest money sustainably.

With the introduction of the EU Green Bond Standard (Regulation 2023/2631, applicable from 21 December 2024), the European Union has taken a major step towards promoting green financing. This standard sets out clear criteria according to which bonds can be classified as "EU Green Bonds" based on their alignment with the EU taxonomy for sustainable investments.

Issuers of green bonds who wish to use the designation "EU Green Bond" must offer comprehensive transparency, including the publication of prospectuses, fact sheets and allocation and impact reports.

The financial supervisory authority BaFin will check whether issuers in Germany fulfil the transparency and information obligations.

Issuance in accordance with the EU Green Bond Standard is voluntary. In addition, green bonds can still be issued in accordance with the guidelines of the International Capital Market Association (ICMA). However, these do not provide a standardised definition of environmentally sustainable economic activities.

To successfully manage green financing, companies should consider the following:

1. On the one hand, it is necessary to develop a green DNA, which means anchoring sustainability and environmental protection in the corporate culture and integrating them into all business processes.
2. On the other hand, a customised form of financing should be identified. In addition to the decision in favour of a label or an ESG structure (e. g. green bonds vs. sustainability linked bonds), the market offers many instruments that can be used for sustainable financing (including loans, promissory notes, factoring).

If the decision is made in favour of EU green bonds, the focus should also be on good preparation and transparent communication.

Pre-issuance:

• Development of a factsheet on how the issuance of the EU Green Bond will contribute to the issuer's sustainability strategy (inter alia: Environmental strategy, intended use of proceeds, the identification and selection process of green projects or the estimated environmental impact), which is subject to a pre-issuance review by an external auditor and must be published.

Post-issuance:

• Issuers must prepare an annual allocation report on the taxonomy-compliant utilisation of proceeds by the time the proceeds are fully utilised, for which a mandatory post-issuance review is not provided.
• Once all proceeds have been utilised, the allocation report is subject to a post-issuance review by an external auditor.
• Once all proceeds have been utilised, issuers must report on the environmental impact achieved at least once during the term of the issue. To this end, they must prepare and publish an impact report. The impact report is not subject to a post-issuance review.

Our advice: A voluntary post-issuance review of the impact report could lead to greater transparency, provide evidence of consistent implementation of the sustainability strategy and reduce greenwashing.

It is foreseeable that the regulation will lead to increased resource and time expenditure for issuers. This effort is offset by the advantages of EU green bonds, in particular their high credibility and transparency. Due to the strict regulation, market interest in these bonds is likely to continue to grow, which could increase the greenium effect.