Explanatory Memorandum to COM(2021)391 - European green bonds

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This page contains a limited version of this dossier in the EU Monitor.

dossier COM(2021)391 - European green bonds.
source COM(2021)391 EN
date 07-07-2021


1. CONTEXT OF THE PROPOSAL

• Reasons for and objectives of the proposal

This proposal is part of the broader European Commission agenda on sustainable finance. It lays the foundation for a common framework of rules regarding the use of the designation ‘European green bond’ or ‘EuGB’ for bonds that pursue environmentally sustainable objectives within the meaning of Regulation (EU) 2020/852 1 (Taxonomy Regulation). It also sets up a system for registering and supervising companies that act as external reviewers for green bonds aligned with this framework. It will facilitate further developing the market for high quality green bonds, thereby contributing to the Capital Markets Union, while minimising disruption to existing green bond markets and reducing the risk of greenwashing. The designation ‘European green bond’ shall be available to all issuers, whether within or outside the Union, that meet the requirements of this proposal.

This legislative proposal aims to better exploit the potential of the single market and the Capital Markets Union to contribute to meeting the Union’s climate and environmental objectives in accordance with Article 2(1)c of the 2016 Paris Agreement on climate change 2 , and the European Green Deal 3 .

The European Green Deal made clear that significant investment is required across all sectors of the economy to transition to a climate-neutral economy and reach the Union’s environmental sustainability objectives. In the 2021-2030 period, the achievement of the Union’s current 2030 climate and energy targets will require energy system investments (excluding transport) of EUR 336 billion per annum (in constant prices of 2015), equivalent to 2.3% of GDP. 4 A substantial part of these financial flows will have to come from the private sector. Closing this investment gap means significantly redirecting private capital flows towards more environmentally sustainable investments and requires comprehensively rethinking the European financial framework.

In particular, the European Green Deal underlined that it should be made easier for investors and companies to identify environmentally sustainable investments and ensure that they are credible. This could be done via clear labels for retail investment products and by developing a European green bond standard that facilitates environmentally sustainable investment in the most convenient way. Despite vigorous market growth, issuance of green bonds remains at a fraction of overall bond issuance, representing about 4 % of overall corporate bond issuance in 2020 5 . Further growth in the market for high quality green bonds will be a source of significant green investment, thereby helping to meet the investment gap of the European Green Deal.

To this end, the European Green Deal Investment Plan of 14 January 2020 6 announced the establishment of a green bond standard. In its December 2020 conclusions on climate change, the European Council 7 stressed the importance of developing common, global standards for green finance and invited the European Commission to put forward a legislative proposal for a green bond standard by June 2021. Finally, in its work programme for 2021, the Commission highlighted “an economy that works for people” as a priority and stressed the importance of continuing progress on sustainable financing, notably by proposing to establish an EU green bond standard 8 .

Because of the widespread use of proprietary market frameworks for green bonds, and despite the fact that some of these frameworks are commonly accepted as setting a standard, it can be costly and difficult for investors to determine the positive environmental impact of bond-based investments and compare different green bonds on the market. For issuers, the lack of common definitions of environmentally sustainable economic activities creates uncertainty about which economic activities can be considered to be legitimately green. In such conditions, issuers may face reputational risks from potential accusations of greenwashing, especially in transitional sectors. In addition, the fragmentation of practices in the area of external review can create additional costs for them. These obstacles may affect the profitability of projects with substantial climate and environmental impact, thereby reducing the supply of such investment opportunities and impeding the achievement of the Union’s environmental goals.

This proposal aims to address these obstacles by setting a standard for high-quality green bonds. This should: (1) improve the ability of investors to identify and trust high quality green bonds, (2) facilitate the issuance of these high quality green bonds by clarifying definitions of green economic activities and reducing potential reputational risks for issuers in transitional sectors, and (3) standardise the practice of external review and improve trust in external reviewers by introducing a voluntary registration and supervision regime.

This proposal for a European Green Bond is anchored to the Taxonomy Regulation. The Taxonomy Regulation sets out a classification of economic activities as environmentally sustainable, including as one of the defining criteria the full compliance with minimum social safeguards. This framework can be used as a benchmark to classify whether an economic activity and, by extension, related assets or projects are green. According to Article 4 of the Taxonomy Regulation 9 , the Union must apply the criteria of the Taxonomy when setting out any standards for environmentally sustainable corporate bonds. 10 Hence, for the purposes of European green bonds, the Commission proposes that the Taxonomy Regulation, and – as they are developed - its Delegated Acts, should define what counts as ‘green’.

This proposal provides a framework for all green bond issuers, including those from the public and private sector, and including financial and non-financial undertakings. The framework is also intended to be usable for issuers of covered bonds as well as securitisations, the securities of which are issued by a special purpose vehicle 11 . The link with the Taxonomy Regulation allows the proceeds from European green bonds to be used for a broad range of economic activities that provide a substantial contribution to environmental sustainability objectives. Building on current market best practices for green bonds, this proposal presents many potential uses, such as a bank issuing a European green bond to finance green mortgages, a steel manufacturer issuing a European green bond to finance a new lower emitting production technology, or a sovereign issuing a European green bond to finance a subsidy scheme for renewable energy installation, to name a few.

This proposal builds on market best practices, as well as feedback and recommendations received from a High-Level Expert Group on Sustainable Finance. The Group’s report, published on 31 January 2018 12 recommended the introduction of an official EU Green Bond Standard, as it was referred to then. As a follow-up, the Commission committed to developing an EU Green Bond Standard in its Action plan for financing sustainable growth 13 adopted on 8 March 2018. It tasked the Technical Expert Group (TEG) on Sustainable Finance, consisting of market participants from different sectors, with drawing up recommendations for an EU Green Bond Standard. The TEG did so in its final report in June 2019, which was followed up by a usability guide for a draft standard in March 2020. Finally, the Commission gathered further insights and input on green bonds in its public consultation on the renewed sustainable finance strategy (open April-July 2020) and its targeted consultation on the EU Green Bond Standard (open June-October 2020).

• Consistency with existing policy provisions in the policy area

This proposal introduces a set of rules that issuers of green bonds must follow in order to call a bond a ‘European green bond’ or ‘EuGB’. It builds on existing market best practices and puts in place additional requirements based on relevant legislation already in place. These requirements are consistent with the objectives of existing policy provisions in the policy area, and in particular the Taxonomy Regulation. This proposal requires issuers of a European green bond to ensure that the proceeds of the bond are allocated to assets and expenditure in full compliance with the requirements of the Taxonomy Regulation, in order to ensure that the bond itself is fully environmentally sustainable. This proposal is also consistent with other sustainable finance initiatives, including the Commission proposal for a Corporate Sustainability Reporting Directive 14 , which will promote the reporting of sustainability-related information by all large corporations and most corporations listed on regulated markets, which therefore also concerns many bond-issuers.

This proposal is also consistent with the Capital Markets Union, which aims to improve the ability of the Union’s capital markets to mobilise and channel investments, which can help to fund the green transition.

• Consistency with other Union policies

This proposal complies with the overarching policy goals of the European Green Deal. The European Green Deal is the Union’s response to the climate and environment-related challenges that define this generation. It aims to transform the Union into a modern, resource-efficient and competitive economy with no net emissions of greenhouse gases by 2050 15 . Moreover, providing a trusted regulated environment that supports the issuance and creation of European green bonds will have a prominent role in promoting the international role of the euro, and help to achieve the goal of developing Union financial markets into a new ‘green finance’ hub, thereby further supporting EU green investments 16 . The Commission could provide technical support to Member States under Regulation (EU) 2021/240 17 to promote European green bonds at national level.

2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY

• Legal basis

This proposal falls within the area of shared competence in accordance with Article 4(2)(a) of the Treaty on the Functioning of the European Union (TFEU) and is based on Article 114 TFEU, which confers the competence to lay down appropriate provisions that have as their objective the establishment and functioning of the internal market.

Article 114 TFEU allows the Union to take measures not only to eliminate existing obstacles to the exercise of the fundamental freedoms, but also to prevent the likely emergence of such obstacles in the future. This also includes those obstacles that make it difficult for market participants, such as issuers of green bonds or investors, to take full advantage of the benefits of the internal market.

The current market for green bonds is entirely based around market-defined standards and practices, with assurance to investors provided by companies acting as external reviewers. These existing standards set out high-level process-based guidelines or recommendations, but the underlying definitions of green projects are insufficiently standardised, rigorous, and comprehensive. This prevents investors from easily identifying bonds whose proceeds are aligned with or are contributing to environmental objectives, including notably the target of limiting the increase in the global average temperature to well below 2℃ and pursuing efforts to limit this to 1.5℃ above pre-industrial levels, as set out in the Paris Agreement. This situation also limits the ability of issuers to make use of environmentally sustainable bonds to transition their activities towards more environmentally sustainable business models.

In addition, currently used market-based standards do not adequately ensure transparency and accountability of external reviewers, and there is no ongoing supervision of companies acting as external reviewers. Consequently, investors have further difficulties in identifying, trusting, and comparing environmentally sustainable bonds.

Different practices therefore co-exist across the Union, which makes it costly for investors to identify genuine green bonds and at the same time prevents the market for green bonds from growing according to its potential.

So far, no Member State has yet legislated to establish an official green bond standard at national level. However, national labelling schemes already set out various requirements for environmentally sustainable financial products, which in some cases may result in requirements on bonds, for example in the case of requirements on bond funds. When comparing sovereign green bonds issued by EU Member States, there are already examples where divergent definitions of environmentally sustainable activities have been applied across Member States. Furthermore, in light of the continued growth of the green bond market and its role in funding the type of fixed investments needed to reach the goals of the Paris Agreement, it is likely that some Member States will consider creating standards or establishing guidelines at national level.

Such national initiatives would likely seek to address the same problems that the proposed EuGB initiative aims to address, but the results may diverge across Member States. It is therefore likely that disparities between national laws would emerge, and these would obstruct the free movement of capital, undermine a European level playing field, and act against the objectives of the Capital Markets Union. Therefore, there is a clear need for a harmonised green bond standard to be applied across the Union by both public and private green bond issuers. The adoption of this Regulation would aim to ensure such harmonised requirements. Article 114 TFEU is therefore the appropriate legal basis.

• Subsidiarity (for non-exclusive competence)

This proposal complies with the principle of subsidiarity as set out in Article 5 of the Treaty on European Union (TEU), according to which Union action may only take place if the envisaged aims cannot be achieved by Member States alone.

The green bond market is inherently international, with participants trading bonds across national borders. Issuers of and investors in financial products require common metrics and definitions to determine which projects and activities are environmentally sustainable, and compare them with each other. Given this situation, national legislative action to tackle the failures identified in the green bond market would have the potential effect of fragmenting the European market for green bonds.

Furthermore, the market for external reviewers of green bonds is a cross-border market. In order to preserve a level playing field for the actors providing these services, a centralised registration and supervisory regime for external reviewers of European green bonds is needed at European level, coordinated by the European Securities and Markets Authority (ESMA).

Therefore, such an initiative cannot be limited to the territory of a single Member State, and coordinated action at Union level is needed. Only an intervention at Union level can define consistent and standardised requirements for European green bonds to improve the functioning of the Single Market and prevent market distortion.

Finally, given the many interactions between the European green bonds proposal and other relevant Union-level legislation, such as the Taxonomy Regulation, a Union instrument appears to be more suitable to address the current situation.

For the reasons given above, uniformity and legal certainty of the exercise of the Treaty freedoms can be better ensured by action at Union level.

• Proportionality

This proposal complies with the principle of proportionality as set out in Article 5 TEU. The proposed measures are necessary to achieve the objectives, and also the most suitable.

Putting in place a harmonised voluntary standard for a green bond at Union level will set the benchmark for high-quality green bonds on European and possibly global markets, without imposing the use of the standard on current market participants. By allowing the removal of certain impediments to the proper functioning of the market for high quality green bonds, this Regulation could help to direct capital flows to environmentally sustainable projects and facilitate cross-border green investments. Given the risk that inaction will lead to market fragmentation and investor confusion, this proposal will provide for legal clarity, transparency and comparability of European green bonds across the Union.

The stakeholder feedback and impact assessment for this proposal both identified the main problem drivers to be the lack of a consistent definition of what are environmentally sustainable ways to use of proceeds green bonds, and the lack of ongoing supervision of external reviewers. This proposal goes no further than what is necessary to address and remedy each of these issues, namely by: (1) creating a voluntary standard for green bonds requiring that the use of proceeds is in alignment with the requirements of the Taxonomy Regulation, and (2) requiring issuers of European green bonds to obtain a pre- and post- issuance review from an external reviewer registered and supervised in line with the requirements of this Regulation. State auditors or other public entities mandated by sovereign issuers are not subject to the registration and supervision requirements of this Regulation, as they are statutory entities with responsibility for oversight over public spending and typically have legally guaranteed independence.

• Choice of the instrument

This proposal aims to put in place a common set of requirements for a harmonised standard for European green bonds, which will further simplify environmentally sustainable investments and support a coordinated way of improving the functioning of the single market. A directly applicable Regulation is necessary to achieve these policy objectives and is the best way to deliver maximum harmonisation while avoiding divergences related to uneven implementation.

3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS

• Ex-post evaluations/fitness checks of existing legislation

There is currently no EU-level legal regime for green bonds.

• Stakeholder consultations

The Commission launched an open public consultation on the renewed sustainable finance strategy on 8 April 2020, which was open for 16 weeks. This consultation included over 100 questions, including several on standards and labels for financial products as well as on the EU Green Bond Standard, as it was known then. The Commission received over 600 replies to this consultation from a wide range of stakeholders. A feedback statement with an overview of the contributions received has been published on the Commission’s website 18 .

As part of the process, the Commission also launched a targeted consultation on 12 June 2020 to seek further input from stakeholders on the EU GBS. This consultation was open for 16 weeks and closed on 2 October 2020 after receiving 167 responses. The replies have been published online 19 . The consultation document consisted of 19 questions in total and focused on two main topics, namely on the EU GBS and on social bonds and COVID-19. Contributions were received from a wide range of stakeholders, including company/business organisations, business associations, consumer organisations, NGOs and public authorities. Geographically, replies were received from 20 Member States, 2 other European countries and 2 non-European countries.

• Collection and use of expertise

The Commission carried out structured in-depth interviews with 11 selected stakeholders from different sectors and Member States in May and June 2020.

In addition, between 2 December and 23 December 2020, the Commission carried out a short consultation of national debt management officers through the Council’s Economic and Financial Committee (EFC) subgroup on European sovereign debt markets (ESDM) green bonds working group, using a targeted questionnaire. The questionnaire was also circulated to the Member States Expert Group on sustainable finance (MSEG), and respondents were asked to coordinate their responses per Member State. 17 Member States provided feedback.

The Commission also held regular calls with the European Securities Markets Authority (ESMA) for its opinion and advice, including regarding a potential registration and supervision regime for external reviewers at Union level.

The Commission’s Joint Research Centre prepared several academic papers, working papers, and reports regarding green bonds: (1) “Green bonds and companies’ environmental performance: a feasibility study”; (2) “Green bonds and use of proceeds reporting: what do we know from market data providers?”; (3) “The pricing of green bonds. Are financial institutions special?”; i “Green Bonds as a tool against climate change”.

The European green bonds initiative has been discussed at regular meetings of the Member State Expert Group on sustainable finance since 2019: Member States were updated on a regular basis and took part in discussion s on specific issues, such as the link to the Taxonomy Regulation and the format and the nature of a potential European green bonds initiative.

• Impact assessment

Contents

1.

The impact assessment considered a range of policy options across three key policy dimensions, in addition to the baseline situation where no Union action is taken:


On the scope of application of the standard for green bond issuers, the options considered were (1) a voluntary approach whereby green bond issuers would be free to choose whether or not to align with the future European green bonds initiative and (2) a mandatory approach whereby all green bonds issued in the EU or by an EU-based issuer would have to make use of the future European green bonds initiative.

Concerning the regulatory treatment of external reviewers of European green bonds, the options considered were (1) tasking ESMA with authorising external reviewers of European green bonds, with limited supervisory oversight and requirements, and (2) tasking ESMA with authorising and supervising external reviewers of the EU GBS under a more stringent framework.

On the potential flexibility afforded to sovereign issuers who wish to issue European green bonds, compared to non-sovereign issuers, the options considered were (1) no flexibility, (2) flexibility with regards to bond-related requirements but not the application and implementation of the Taxonomy Regulation, and (3) flexibility with regards to bond-related requirements and with regards to the Taxonomy Regulation.

Results from two online consultations on this subject showed that a large majority of stakeholders supported the concept for an EU Green Bond Standard, as it was known then, as proposed by the Technical Expert Group for sustainable finance, including the requirement for a voluntary standard. Only a very small minority expressed support for a mandatory standard.

A large majority of respondents expressed their support for a regulatory regime for external reviewers under ESMA’s supervision, with many asking for a proportionate regime. This indicates that most stakeholders would mostly favour the option of a lighter or more targeted supervisory regime.

Current and potential sovereign green bond issuers in the Union were consulted on potential flexibility for sovereign issuers, and were evenly divided on the question of whether or not to have flexibility with regards to the Taxonomy Regulation. However, there was strong support for maintaining a consistent approach with regards to sovereign and corporate issuers.

2.

Based on an analysis of the various options and feedback received from stakeholders, the impact assessment identified as preferred option that:


the European green bond initiative is established as a voluntary standard aligned with market best practice and the Taxonomy Regulation,

ESMA is tasked with authorising external reviewers of European green bonds with limited supervisory requirements, and

sovereign issuers are afforded some flexibility in relation to the enforcement of European green bonds, but not with regards to their application and interpretation of the Taxonomy Regulation.

The preferred option builds on market best practices in the field of reporting and external review, and on the alignment with the Taxonomy Regulation. These elements would position the European green bond initiative as the foremost standard in terms of transparency and environmental credibility, in line with the objective of developing and supporting the market for higher quality green bonds. The proposed voluntary standard in conjunction with a light supervisory approach would ensure that the Union’s objectives are achieved in the most cost-efficient and effective way.

A voluntary standard would appeal to issuers of high quality green bonds, many of whom expressed support for the European green bond initiative, as it would allow them to communicate more clearly with investors and others about their environmental credentials and commitments. At the same time, it would help avoid disruptive impacts on existing green bond markets, which can continue to operate freely. This would facilitate the creation of a competitive market environment that would allow investor demand rather than regulatory requirements to drive future issuances.

A lighter, targeted supervisory approach to external reviewers would increase transparency for issuers and investors of external review procedures, improve harmonisation of certain aspects of the various approaches and address issues related to conflicts of interest, without discouraging existing providers from registering under the regime and acting as reviewers for European green bonds.

By implementing the option of limited flexibility for sovereigns, Member States would be able to issue European green bonds on a level playing field with corporations, while still benefiting from some flexibility that takes into account their institutional specificities. Just as for other users, the decision to align with the requirements of the European green bond initiative would be voluntary for sovereigns to apply.

Overall, the standard would provide clear advantages in terms of trust, which may translate into pricing advantages in the bond and provide a new incentive for issuers to use it. Likewise, issuers may want to demonstrate a stronger green commitment by issuing under the standard.

Investors would be provided with a green bond segment that ensures a high degree of market integrity, transparency and comparability, and provides a common definition of green, thereby increasing comparability and trust. The initiative would provide investors with more choice and would benefit especially the most committed green investors, who value a stricter green definition. Institutional investors could clearly set themselves apart from the rest of the market by focusing their bond investments on European green bonds.

External reviewers may incur additional costs if they want to comply with the standard. In addition to supervisory fees, which should be kept to a minimum for the time being, reviewers would have to incur some direct compliance and legal advisory costs as well as organisational costs in order to be authorised by ESMA.

Issuers would still be able to issue green bonds under different market standards. The costs of using the standard are mainly costs that may be passed on from external reviewers as well as costs relating to applying the taxonomy. However, costs related to applying the taxonomy would be already incurred under other initiatives (e.g. the Non-Financial Reporting Directive 2014/95/EU 20 ), meaning that parts of these costs would be offset.

The initiative provides a clear definition of ‘environmental sustainability’ and facilitates the identification of high-quality green bonds in the market. The increase in transparency should improve market efficiency and drive more investments into higher-quality green projects and assets, especially in conjunction with new disclosure requirements stemming from other parts of the wider sustainable finance action-plan. Higher market trust may furthermore lead to pricing advantages, which can promote the financing of taxonomy-aligned assets and projects. These factors should help the European economy to transition to carbon neutral and overall less polluting technologies and production processes more quickly, resulting in positive impacts on both the environment and society in general.

• Regulatory fitness and simplification

This proposal was not part of a fitness check.

• Fundamental rights

This proposal respects fundamental rights and observes the principles recognised in particular by the Charter of the Fundamental Rights of the European Union.

4. BUDGETARY IMPLICATIONS

This proposal empowers ESMA to carry out a new function to register and supervise external reviewers providing their services under this Regulation. This will require ESMA to charge fees to external reviewers, which should cover all administrative costs incurred by ESMA for its activities in relation to registration and supervision of an external reviewer.

Based on an estimation of 0.2 full-time equivalents per entity and a total of three external reviewers seeking registration in the first four year-period, 21 the requirement would only be for 0.6 full-time equivalents to carry out registration and ongoing supervision. However, there should be strong potential synergies with ESMA’s existing responsibilities resulting from the review of the operations of the European Supervisory Authorities (ESAs) for which ESMA was provided with additional staff and budgetary resources 22 . In addition, in the context of the planning of the draft Union budget for 2022, all agencies have been encouraged to realise reasonable annual efficiency gains of between 1% and 2%. As such, it is envisaged that no additional resources would be required specifically for this proposal.

5. OTHER ELEMENTS

• Implementation plans and monitoring, evaluation and reporting arrangements

When evaluating this initiative, the Commission will take the sources and indicators mentioned below into account and rely on a public consultation and discussions with ESMA and competent authorities. The evaluation shall be conducted according to the Commission's better regulation Guidelines.

3.

Indicators:


total amount issued, total amount outstanding, total volume, and prices of bonds making use of the designation ‘European green bond’, and of bonds earmarked as ‘green’ (but not necessarily making use of the designation ‘European green bond’) issued per annum and outstanding [EU and globally];

data on liquidity in the markets for bonds making use of the designation ‘European green bonds’, bonds earmarked as ‘green’, and other bonds outstanding (as a benchmark i.e. from the same/similar issuers);

number of external reviewers registered under the present Regulation;

data on regulatory fees paid by these external reviewers;

complaints and/or supervisory reports concerning compliance with this Regulation.

4.

Sources:


ESMA database of registered external reviewers,

ESMA database of regulatory fees and charges,

ESMA database of notifications and complaints,

external databases related to the bond market,

direct and consultative input from stakeholders.

IT development and procurement choices will be subject to pre-approval by the European Commission Information Technology and Cybersecurity Board.

• Detailed explanation of the specific provisions of the proposal

Title I, by means of Article 1, lays down the subject matter of the Regulation, namely uniform requirements for issuers of bonds that voluntarily wish to use the designation ‘European green bond’ or ‘EuGB’ (European green bonds) for their environmentally sustainable bonds made available to investors in the Union, and the establishment of a registration system and supervisory framework for external reviewers of European green bonds.

Article 2 sets out the definitions for the purposes of this Regulation.

Title II of the Regulation sets out the conditions for the use of the designation ‘European green bond’ or ‘EuGB’.

Chapter 1 covers the bond-related requirements.

Article 3 limits the use of the designation ‘European green bond’ or ‘EuGB’ to issuers of bonds that comply with the requirements of this Title, until maturity of the bond. The framework is intended to be usable by any bond issuer, including issuers of covered bonds as well as securitisations, the securities of which are issued by a special purpose vehicle. Furthermore, the framework is intended to be usable by issuers both within and outside the Union, when making bonds available to Union investors.

Article 4 lays down that issuers must allocate the proceeds only to financing eligible fixed assets, eligible expenditures or eligible financial assets, or a combination thereof. The article maintains that bond issuers are not allowed to deduct costs from the collected proceeds for the purposes of this allocation. It also allows sovereign issuers to allocate bond proceeds to certain other types of expenditure, in addition to those mentioned in Article 4(1).

Article 5 determines to which categories eligible financial assets must belong for the purposes of this Regulation, and what types of assets and expenditure such financial assets should finance.

Article 6 requires that all use of bond proceeds shall relate to economic activities that meet the requirements for environmentally sustainable economic activities set out in Article 3 of Regulation (EU) 2020/852, namely (1) making a substantial contribution to one or more of the environmental objectives set out in Article 9 of that Regulation, (2) not significantly harming any of those environmental objectives, (3) being carried out in compliance with the minimum safeguards laid down in Article 18 of that Regulation, and i complying with the technical screening criteria established by the Commission in accordance with Articles 10(3), 11(3), 12(2), 13(2), 14(2), and 15(2) of that Regulation.

In view of the expected technological advancements in the field of environmental sustainability, delegated acts adopted in accordance with Articles 10(3), 11(3), 12(2), 13(2), 14(2) or 15(2) of Regulation (EU) 2020/852 laying down the technical screening criteria are likely to be reviewed and amended over time. This is why Article 7 sets out which taxonomy requirements referred to in Articles 4 to 6 have to be used by issuers.

For the purposes of this chapter, it should be noted that the use of the designation ‘European green bond’ or ‘EuGB’ is without prejudice to the requirements of Regulation (EU) No 575/2013 of the European Parliament and of the Council 23 , Regulation (EU) No 806/2014 of the European Parliament and of the Council 24 , Regulation (EU) 2017/1129 of the European Parliament and of the Council 25 , Regulation (EU) 2019/2033 of the European Parliament and the Council 26 , Directive 2013/36/EU of the European Parliament and of the Council 27 , Directive 2014/59/EU of the European Parliament and of the Council 28 , and of Directive (EU) 2019/2034 of the European Parliament and the Council 29 . Moreover, no provision in this Regulation should be interpreted as restricting the issuer’s ability to use the bonds to cover losses resulting from other activities, assets or parts of the entity. Neither should any provision in this Regulation be interpreted as restricting the power to write down or convert relevant capital instruments or liabilities of an institution pursuant to Directive 2014/59/EU, or upon the occurrence of a trigger event in accordance with Regulation (EU) No 575/2013 or Regulation (EU) 2019/2033 as applicable.

For the purposes of this chapter, it should also be noted that the requirement to allocate the proceeds of European green bonds to the financing of eligible assets or expenditures should not prohibit the issuer of such bonds from using fixed or financial assets as a security for the bond, nor should it prohibit such issuers from linking the return paid to holders of the bond to the performance of the project financed by the bond.

Chapter II sets out the transparency and external review requirements for European green bonds.

Article 8 clarifies that the bond may only be offered to the public in the Union after prior publication of the European green bond factsheet, drawn up in accordance with Annex I, on the issuer’s website together with the pre-issuance review of the European green bond factsheet by an external reviewer.

Article 9 imposes an obligation upon the issuer to draw up European green bond annual allocation reports yearly, in accordance with Annex II, until the full allocation of the proceeds of the bond, and publish them no later than three months following the end of the reference year. The issuer is also required to obtain post-issuance review by an external reviewer of the first allocation report following full allocation of bond proceeds.

Article 10 sets out the requirement for the issuer to draw up an impact report in accordance with Annex III after the full allocation of the proceeds at least once during the lifetime of the bond.

Issuers that are sovereigns may, in accordance with Article 11, also obtain pre- and post-issuance reviews from a state auditor or any other public entity that is mandated by the sovereign to assess alignment with this Regulation.

Article 12 sets out requirements for those European green bonds for which a prospectus must be issued.

Article 13 sets out obligations for issuers to maintain on their websites until the maturity of the bonds all the documents drawn up by the issuer subject to Articles 8 to 12, including respective pre-issuance and post-issuance reviews. This Article also introduces requirements regarding the use of languages and requires the notification of certain documents drawn up in accordance with this Regulation to ESMA.

Title III of the Regulation sets out the conditions for taking up activities as external reviewers for European green bonds. This title does not apply to state auditors and other public entities mandated by sovereign issuers to assess compliance with the Regulation.

Chapter I introduces the conditions for taking up activities as external reviewers. This includes the requirement to be registered and to meet the conditions for registration on an ongoing basis. Article 15 envisages RTS and ITS mandates to further specify certain criteria for the registration of external reviewers and certain standard forms, templates and procedures. Once registered, an external reviewer may conduct its activities throughout the entire territory of the Union. An external reviewer has to apply for registration from ESMA. An external reviewer has to notify ESMA in case of material changes to the conditions for its initial registration before such changes are implemented. ESMA has a possibility to refuse to register an external reviewer under Article 15 and to withdraw its registration under certain conditions under Article 51. Article 59 introduces a requirement for ESMA to maintain a database on its website with all registered external reviewers, including those that are temporarily prohibited from pursuing activities under this Regulation and whose registration was withdrawn.

Chapter II sets out requirements regarding the organization, processes and documents concerning governance for external reviewers. It sets out the general principles in Article 18 by requiring the external reviewer to employ appropriate systems, resources and procedures and by requiring the external reviewer to monitor and evaluate at least annually the adequacy and effectiveness of its systems, internal control mechanisms and arrangements and take appropriate measures to address any deficiencies. Articles 19 to 28 lay down in more detail the requirements regarding the senior management; analysts, employees and other persons directly involved in assessment activities; compliance function; internal policies and procedures; assessment methodologies and used information; errors in assessment methodologies or in their application; outsourcing; record-keeping requirements; avoidance of conflicts of interest; and the provision of other services. Articles 18 to 23, and 25 lay down RTS mandates to further specify the criteria necessary to assess the organizational requirements, processes and documents concerning governance of external reviewers.

Chapter III sets out requirements regarding pre-issuance and post-issuance reviews. Article 29 makes it clear that neither a pre-issuance review nor a post-issuance review may refer to ESMA or any competent authority in such a way that could indicate or suggest endorsement or approval by ESMA or any competent authority of the relevant document or any assessment activities of the external reviewer. Article 30 establishes requirements for the information external reviewers shall make available free of charge on their websites, which includes all pre-and post-issuance reviews under this Regulation.

Chapter IV establishes rules on the provision of services by third-country external reviewers.

Title IV lays down, in its Chapter I, the powers of national competent authorities to supervise bond issuers to ensure that Articles 8 to 13 of this Regulation are applied. It also includes several provisions that specify the administrative sanctions and other administrative measures that competent authorities may impose as well as rules on the publication and reporting to ESMA of those sanctions.

In its Chapter II, this title sets out ESMA’s powers with regard to the supervision of external reviewers. These include the power to request information by simple request or by decision, the power to conduct general investigations as well as the power to conduct on-site inspections. The chapter also sets out the conditions under which ESMA may exercise its supervisory powers. Several provisions specify the supervisory measures, fines and periodic penalties ESMA may impose. ESMA is also enabled to charge registration and supervisory fees.

Title V on Delegated Acts confers on the Commission the power to adopt delegated acts subject to the conditions laid down in Article 60.

Title VI on final provisions sets out a transitional provision for external reviewers in the first 30 months following the entry into application of this Regulation.