The European Green Bond Standard (EU GBS) Regulation has entered the stage of negotiating the final text. Triodos Investment Management welcomes the introduction of the EU GBS for two reasons: it will help investors to identify green investments and we hope this standard will help and encourage companies to issue more green bonds. As a result, more money will be allocated to new projects that bring about environmental or societal benefits. However, the current EU GBS draft regulation raises concern: it lacks hard requirements that apply to the issuer of a green bond. It leaves too much room to hide for issuers, meaning that basically any company can issue a green bond under the EU GBS. This would imply that harmful activities can be financed with the proceeds of the bond, despite the green promise.
The regulation should not only set clear and strict requirements for the green bond itself but also for the issuer. Why? Because investors should not only have the comfort that the green bond clearly contributes to a better overall sustainability performance of the issuer, but also that no harm is done in any other parts of the issuer’s business. By investing in a green bond, the investor is also exposed to the issuer itself, as the proceeds of a green bond run through the balance sheet of the issuer. So, even though there may not be a direct link to harmful activities, the investor could still have indirect exposure to harmful activities through the backdoor. Adding strict requirements to the issuer is vital for preventing harm.
For that reason, we welcome and wholeheartedly support the efforts of the European Parliament to strengthen the requirements for the issuer. The European Parliament proposes that the issuers of a green bond must have a clear transition plan and must disclose to what extend their business aligns to taxonomy related activities. Moreover, the issuer must be transparent on how it manages potential adverse impacts implied by its own operations and value chain. The European Parliament also proposes that issuers must disclose if proceeds of a green bond are used to finance nuclear power or gas related activities.
The EU GBS should safeguard that companies do not get away with issuing green bonds as green side pockets within their organisation whilst doing harm in other parts of the business. The regulation can only be effective if it ensures that green bonds can only be issued when the use of proceeds are embedded in the wider green strategy of the company and help companies to improve their overall sustainability performance.
We call upon policymakers to adopt the amendments tabled by the European Parliament.