Legal Updates

Background

On 6 July 2021, the European Commission submitted a legislative proposal for the introduction of a European Green Bond Standard (the “EUGBS”), seeking to promote sustainable finance by making it easier for market participants to raise large-scale financing for climate and environmentally-friendly investments. Subsequently, on 28 February 2023, the European Parliament (the “EP”) and the Council of the EU announced that a provisional agreement had been reached on the EU green bond framework as considered in our March 2023 briefing note (Provisional Agreement Reached on EU Green Bond Framework).

Following extensive negotiations, the European Green Bond Regulation (the “Regulation”) introducing the EUGBS was adopted on 5 October 2023 by the EP (European Green Bond Framework). The Regulation lays down the foundation for a common framework that bond issuers, whether within or outside the EU, will need to follow if they wish to label their green bonds as a “European Green Bond” (“EUGB”).

The Regulation

The key aspects of the Regulation are:

• Use of proceeds: at least 85% of the net proceeds raised by the EUGB must be invested in “environmentally sustainable” activities aligned with the EU Taxonomy Framework (the “Taxonomy”) prior to maturity of the EUGB. Up to 15% of the net proceeds can be allocated to (i) activities for which there are no technical screening criteria in force at the date of issuance, provided the activities comply with the generic criteria for ‘Do No Significant Harm’, as set out in Delegated Regulation (EU) 2021/2139, and/or (ii) activities in the context of international support, provided those activities comply with the appropriate technical screening criteria on a best effort basis. Additionally, issuers may use the proceeds of the EUGB to finance (i) fixed (tangible or intangible) assets that are not financial assets, provided that those fixed assets relate to economic activities that meet the Taxonomy, (ii) capital expenditures (“CapEx”), and/or operating expenditures (“OpEx”), created no later than three years after the issuance of the EUGB, (iii) financial assets (i.e. financial claims and equity instruments), created no later than five years after the issuance of the EUGB and (iv) assets and expenditures of households.

• Transparency: issuers will be subject to specific and standardised disclosure requirements set out in so-called “template formats” to ensure full transparency on the allocation of proceeds and the environmental impact of the EUGB which will enable potential investors to evaluate and compare EUGB. In terms of disclosure requirements, issuers should publish:
  • pre-issuance factsheets, to be published prior to the issue and which set out, among other things, how the EUGB is expected to contribute to the wider environmental strategy of the issuer and the projected allocation of proceeds to Taxonomy-aligned activities;
  • post-issuance annual allocation report to be published annually until full allocation of the proceeds and which outlines how the proceeds of the EUGB have been allocated to Taxonomy-aligned activities; and
  • an impact report on the environmental effect of the EUGB to be published following full allocation of the proceeds. The impact report should clearly specify the metrics, methodologies and assumptions applied in the assessment of the environmental impact.
• Review by external parties: the EUGB must be reviewed by external reviewers (registered with and supervised by the European Securities Market Authority) for compliance with the EUGBS (including the Taxonomy). External reviewers are required to employ appropriate systems, resources and procedures to comply with their obligations under the Regulation. In particular, external reviewers must demonstrate that they have sufficient experience and that appropriate corporate governance procedures are in place, specifically to deal with potential conflicts of interest. An important provision of the Regulations pertains to the mandatory external review of (i) the pre-issuance factsheet and (ii) the post-issuance annual allocation report. This obligation has been implemented with a view to ensuring that a third party assesses and validates the accuracy of information contained in issuers’ disclosures and their compliance with the requirements of the Regulation. All the required reports as well as the external reviews need to follow standardised templates, which are set out in the Annexes to the Regulation.

• Required Documentation: Issuers who wish to issue a EUGB must publish a prospectus that complies with the EU Prospectus Regulation (the “EU PR”), unless they are exempt from the requirement to issue a prospectus, such as EU sovereign or quasi-sovereign issuers. Essentially, this means that EUGB will need to be listed on a regulated market. The Regulation does not impose any substantial disclosure obligations for the prospectus itself. The exception to this is where an issuer chooses to finance OpEx or CapEx with the proceeds from a EUGB. In that instance, the prospectus needs to include a summary of the issuer’s capex plan.

• Sanctions and Penalties: the EU regulator (the “national competent authority” or “NCA”) that approves the prospectus under the relevant member state EU PR will be responsible for supervising an issuer’s compliance with the EUGBS. Pursuant to the Regulation, the relevant NCA has an array of powers to ensure compliance, including the power to suspend approval of a prospectus, withdraw the EUGBS label or prohibit an issuer from issuing EUGB for up to a year. In addition, the Regulation includes the power to issue monetary fines of up to 0.5% of an issuer’s turnover and EU member states may choose to impose criminal sanctions for non-compliance.

Next Steps

The Regulation becomes applicable after approval by the European Council following which the text will be published in the Official Journal of the European Union and will enter into force 20 days from the date of publication. It will start applying 12 months after its entry into force. The Regulation will provide both issuers and investors with clearer and more transparent criteria for the financing of sustainable investments towards a low carbon economy, essential to meet the European Green Deal’s goals.

How can Dillon Eustace help?

Should you have any queries or require any further information in respect of the Regulation and the potential implications that it may have for your business and the sector in which you operate, please contact the authors of this briefing note or your usual Dillon Eustace LLP contact.