Green bonds, a growing market and new regulations

Marcos Eguiguren Huerta
Associate Provost for Strategic Projects
Director of the International Chair in Sustainable Finance UPF-BSM and Triodos

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What is the standardization of green bonds proposed by the EU?

The green bond market is a growing market. As of December 2020, according to data from the Climate Bond Initiative, green bonds accounted for USD 1.1 trillion, with 1,428 large issuers from 71 different countries. Its main issuers are large energy companies, certain financial development companies and essential services companies, such as water treatment, although they can also be issued by public administrations for specific issues, such as clean transport and pollution prevention, among others.

The main types of activities that are financed through this kind of financial instrument, which lately have yields slightly higher than those of traditional fixed debt, are renewable energy, access to essential services, sustainable water treatment and management, and energy efficiency.

To regulate the issuance of this type of debt, the European Union has recently reached an agreement principle for the creation of a European Green Bond Standard (EUGBS). But what exactly is this standardization of green bonds?

The European Green Bond Standard can optionally be met by companies issuing fixed-income securities as a form of financing. The EUGBS allows investors to be more confident that their money will go to sustainable technologies and projects, and aims to exceed the Green Bond Principles, thus generating its own standard adapted to European taxonomy. It also aims for bond markets to be clearly aligned with that taxonomy, thus avoiding questionable interpretations.

What changes will it bring to the market?

A priori, the new standard, although optional, will mean that there is greater clarity as to the destination of the issued quantities. It is possible that, in the short term, this implies greater selectivity on the part of issuers, who will doubt whether to qualify their issue as “green” due to the type of supervision and the requirements that this implies. Despite this, the inertia of the “green” market is so significant that it is very unlikely to mean a decrease in issuance.

Furthermore, given the alignment of the EUGBS with European taxonomy, there is a danger that bond issues that finance projects supporting energy sources based on natural gas or nuclear energy may be considered “green” even though they do not have clear support from civil society or from many experts, despite the fact that they enjoy the ultimate support of the European institutions. It remains to be seen if such situations occur, although, on paper, they would be possible.

Can green bonds be used as greenwash?

Poor standardization of green bonds in the past means that there may be bonds issued that do not allocate the entire amount collected to sustainable activities. From that point of view, it can be said that there is the possibility of a certain amount of greenwashing in these bond issues.

When the new EUGBS enters into force, from 2024, that possibility will be reduced, although the new standard leaves a margin of 15% for the issuance of bonds to finance sectors that are not covered by the taxonomy, albeit in very specific activities. Practice will tell us whether that percentage seeks only necessary flexibility for bond issuers or ends up hiding greenwashing practices. In any case, the main obstacle is that, within the sectors drawn together by the taxonomy, there are some as controversial as the generation of energy using natural gas or nuclear power. Can they be financed with green bonds? Time will tell.