Those looking to make sustainable investments can choose from a wide range of “green”, “sustainable” or “ecological” products. However, it is often unclear what those terms entail and whether they are even appropriate. This will be changing soon, at least for certain bonds. Regulation (EU) 2023/2631 of the European Parliament and of the Council on European Green Bonds (EUGBR), published on 30 November 2023, increases the level of transparency by establishing an EU-wide market standard for “green” bonds: the European Green Bond Standard (EUGBS) (see info box).

In order to meet this standard, bonds must satisfy special conditions linked to environmental sustainability criteria. The EUGBS also defines how external reviewers, national financial supervisory authorities and the European Securities and Markets Authority (ESMA) will ensure that providers uphold these specifications.

In this way, the EUGBS is intended to provide consumers, as well as companies and other institutional investors, with a point of reference regarding green investment options. It aims at enabling investors who would like to invest in sustainable bonds to review and compare with little effort the principles according to which funds of the bond are invested and which reporting obligations the issuers are subject to.

Issuers can decide for themselves whether to issue their bond as an EU Green Bond (EuGB). They can also choose to comply with other sustainability standards, such as the Green Bond Principles of the International Capital Market Association or the Climate Bonds Standard created by the non-profit international Climate Bonds Initiative. However, if an issuer decides to issue their bond as an EuGB, they must adhere to the EUGBS specifications.

EuGB certification: contingent on many conditions

A bond may only be marketed as a European Green Bond if the proceeds of the bond are used for environmentally sustainable purposes as defined in the Taxonomy Regulation, which is referenced by the EUGBR.

Bonds can only qualify as EuGBs if the issuer draws up a prospectus beforehand in accordance with the EU Prospectus Regulation – either because they are required to do so anyway or choose to do so voluntarily. The sole exception is for certain government bonds that are generally exempt from the prospectus requirement. In Germany, these securities prospectuses must be approved by the Federal Financial Supervisory Authority (BaFin) prior to publication. Once approved, they are published on both the issuer’s website and BaFin’s website.

Reporting obligations before, during and after the issue

Issuers of EuGBs must fulfil various reporting and information requirements. The purpose of these requirements is to inform investors on how the proceeds from the bond will be used. For this reason, in addition to the securities prospectus mentioned above, issuers must publish a so-called factsheet prior to the issue. This factsheet contains additional relevant information on how the proceeds are planned to be used in line with the taxonomy. It also demonstrates how the EuGB fits into the issuer’s overarching sustainability strategy.

But will the issuer keep the promises they make in the factsheet? To ensure that consumers and institutional investors are able to verify this, the issuer must also fulfil downstream transparency obligations by publishing allocation reports, which must be published annually until the bond proceeds have been fully allocated. They document that the funds collected with the EuGB have been used in a proper manner.

The impact report explains how the bond proceeds have influenced the environmental targets that the issuer is pursuing with the EuGB issue. The issuer must draw up and publish one of these reports after all proceeds from the issue have been allocated.

Transparency promotes comparability

To make it easier for investors to compare different EuGB issues, there are standardised formats for both the factsheet and the allocation and impact reports. The EUGBR also requires the reports to undergo a pre-issuance and a post-issuance review, in which external reviewers examine the information in the factsheets and in the allocation report to be published after the full allocation of the proceeds. The reviewers must also explain the resulting conclusions in an opinion. The impact report is exempt from this requirement in principle, but issuers can choose to undergo a voluntary review.

In the pre- and post-issuance review of the factsheet and allocation report, the reviewer must also examine whether the bond meets the EUGBR criteria. The post-issuance review additionally takes up the question of whether the proceeds from the bond were used in accordance with the plans outlined in the factsheet.

The issuer must publish the review reports as well as the factsheet, the allocation reports and the impact report on their website. The external reviewers also make their reports available on their own websites. The issuer is required to inform the national competent authorities – in Germany, this is BaFin – and ESMA when these documents are published.

BaFin monitors issuers

As the competent supervisory authority in Germany, BaFin monitors whether the issuers of European Green Bonds fulfil their transparency and information obligations. BaFin also looks at whether the required documents have been reviewed by external reviewers.

The EUGBS grants the national competent authorities special powers in this field: for example, BaFin can require issuers to provide information missing in their reports or to belatedly release documents they have failed to publish. The EUGBR also allows national competent authorities to suspend or prohibit an issuer’s offer. Sanctions are also possible in the event that issuers violate the Regulation, but the specific form of these sanctions must still be defined at national level.

What are the national competent authorities not responsible for? They do not check whether the information published by the issuer in the factsheets and reports is actually truthful – whether an EuGB actually adheres to the criteria of the Taxonomy Regulation or whether the bond proceeds are used properly. Issuers of government bonds are also not subject to supervision by the national competent authorities.