EU Green Bond Standard a ‘wasted opportunity’ for issuers

Frustrations around alignment with EU taxonomy hamper progress

The creation in February of a European Green Bond Standard has been regarded as a positive step towards a common framework for green bonds under the European Union taxonomy. It provides a high bar for issuers to meet, but it has perhaps been set too high.

Issues with the EUGBS were raised at the inaugural European agency and sub-sovereign forum, hosted by OMFIF’s Sovereign Debt Institute in Paris. This in-person event brought together a group of the leading agency and sub-sovereign issuers in Europe, along with investors, banks, policy-makers and other market participants for an in-depth discussion on the key issues affecting this segment of the public sector bond market.

For the issuers convened at the OMFIF forum, the main concern was ensuring that at least 85% of the funds raised by their green bonds are aligned with the EU taxonomy. The 15% so-called ‘flexibility pocket’ of the EUGBS is simply not enough leeway for issuers.

‘It’s a great ambition… but I have to say I can’t deliver any assets which can apply to this new standard,’ said a funding official at a European agency. ‘We have so many exclusions which don’t apply to our business model,’ he said.

The funding official also said that most of their domestic on-lending and export and project financing are excluded from the green asset ratio. ‘We want to be the first issuer of the new EUGBS but we are unable to,’ he added. ‘Maybe the EU went too far with the standard.’

These views were shared by several other borrowers at the OMFIF forum. ‘For us, the famous 15% flexibility pocket is not enough,’ said a funding official at another European agency. ‘We are a local government lender and, when we look at waste recycling and water management, that is 20% to 30% of the green lending that we’re doing.’

‘Having said that, we have a bond-by-bond approach,’ he said. ‘We do one allocation reporting for each bond transaction. So, for issuers who do this, one option might be to say, well, I will do one green bond standard transaction and then for the next one, I’m outside the green bond standard.’

Other issuers who combine their green and social issuance with the use of sustainable bonds are also finding it difficult to meet the flexibility pocket of the EUGBS.

A funding official at a European sub-sovereign said they issued a sustainability bond last year but ‘it was incredibly difficult to get all the information that is required for the taxonomy’. ‘We really worked a long time on this with a lot of experts and we only got to 67%’ alignment, she said.

In a poll of the attendees at the OMFIF forum, one-third said the EUGBS was a wasted opportunity, highlighting the frustration among issuers in aligning their issuance with this new regulation.

Another funding official argued that EU taxonomy alignment was not suitable for development agencies. ‘Our opinion is that development agencies are there to be available for transition financing and a project that is supporting the transition will never ever meet taxonomy conformity,’ he said. ‘So really, you have to ask: is it feasible for development agencies to issue a taxonomy-conformed product?’

Investors are also under pressure in aligning themselves with the EUGBS. ‘Right now, we have regulatory pressure,’ said an analyst at an asset manager. ‘We need to actually prove that what we’re selling is true. This proof, in the particular case of green bonds, is to see more and more taxonomy-aligned green bonds. I know that’s a challenge for issuers and it’s also a challenge for us because to show leadership in that space, we need issuers to actually go in that direction.’

There has also been a proposal for a separate social taxonomy to help classify and standardise this part of the market. ‘That’s a real strong point of discussion with investors – how to identify and classify social bonds for their portfolio and how to measure it,’ said a funding official at a European social bond issuer. but they noted this was ‘trickier’ than for green bonds, which are far easier to measure the impact of.

However, according to an investor, a social taxonomy is perhaps not necessary. ‘To go back to the origin of the green taxonomy, one of the challenges that was identified was the question around the credibility of the existing standards or the lack of standards,’ he said. ‘At that point, the question that everyone wanted to address was the risk of greenwashing. So if you want to address greenwashing, you need to have a dictionary or something that will help you to actually identify what a green asset is. So I don’t know if we need a social taxonomy to actually develop further the social bond market.’

Burhan Khadbai is Head of Content, Sovereign Debt Institute, OMFIF.

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