The European Union aims to boost the financing of sustainable investment by creating a high-quality green bond issuance standard, which it also hopes will raise overall standards, combat greenwashing, protect market integrity, and ensure the financing of only legitimate environmental projects.

The proposed standard, known as the European Union Green Bond Standard (EUGBS), is a voluntary set of measures announced on July 6 in Brussels as part of the EU’s sustainable finance strategy.

The EUGBS will be open to any green bond issuers, both private and sovereign, including those located outside of the EU, particularly in Asia. Green bonds are highly popular, with issuance among Asia-Pacific borrowers more than doubling to a record US$69 billion in the first five months of 2021 in the wake of financing requirements arising from the Covid-19 pandemic.

Bonds issued under the EUGBS framework must meet four key requirements:

•  funds raised by the bond should be allocated fully to projects aligned with EU taxonomy
•  there must be full transparency on how bond proceeds are allocated through detailed reporting requirements
•  bonds must be checked by an external reviewer to ensure compliance with the standard
• funded projects must align with EU taxonomy. 

Under the EUGBS, external reviewers providing services to issuers of green bonds must be registered with and supervised by the European Securities Markets Authority to ensure the quality and reliability of their services and reviews, protect investors and ensure market integrity. Specific, limited flexibility is foreseen here for sovereign issuers.

With the EUGBS, issuers of green bonds will have a robust tool at their disposal to show they are funding green projects aligned with the EU’s taxonomy. Investors buying the bonds will be able to more easily see that their investments are sustainable, thereby reducing the risk of greenwashing.

“The EUGBS will set the gold standard for how companies and public authorities can use green bonds to raise funds on capital markets to finance ambitious investments,” according to an EU statement.

Critics argue that the voluntary nature of the new standards means it will have limited impact in terms of preventing greenwashing and ensuring the legitimacy of environmental projects financed through green bonds.

The EUGBS is not expected to be in place for the next 18 months because of the challenges that come with bringing it within alignment of the EU taxonomy.