European Council adopts new green bonds regulation to promote sustainable finance

The green bond market, both globally and at EU level, grew by an average of 50% per year in the period 2015-2020. Green bond issuance is, however, small compared to total bond issuance (3 to 3.5%). This results in potential for green bond growth.

To reduce the risk of greenwashing in the green bonds market and to help channel more money into carbon neutral and lower polluting technologies and production processes, the European Council adopted, on 23 October 2023, a regulation creating a European green bond standard, the first of its kind in the world.

The regulation defines uniform requirements for issuers of bonds who wish to use the “European green bond” or “EuGB” label for their environmentally sustainable bonds that are made available to investors in the EU.

Green bonds are one of the main fixed-income instruments for financing investments related to green technologies, energy efficiency and resource efficiency. The new standard will increase transparency to improve market efficiency and drive more investments. In addition, the new regulation will also stimulate consistency and comparability in the market, which benefits issuers as well as investors.

Consequently, issuers will have to demonstrate that they are funding green projects aligned with the EU taxonomy in order to be awarded the EuGB label. Investors will be able to assess and compare sustainable investments more easily, which is expected to ultimately stimulate capital flows into environmentally sustainable projects. In addition, the regulation establishes a system to register and supervise external reviewers of European green bonds.

Before the maturity of a European green bond, the proceeds of such a bond will need to be allocated in full, in accordance with the taxonomy requirements, to sustainable economic activities, provided the sectors concerned are already covered by it. For those sectors not yet covered by the EU taxonomy and for certain very specific activities, issuers will be allowed to allocate up to 15% of the proceeds to economic activities, which are aligned with the EU taxonomy, with more flexibility. The regulation aims, with this regime, to enable the usability of the green bond standard from the beginning of its application.

Furthermore, the regulation also provides for optional disclosure templates for bonds marketed as environmentally sustainable and for sustainability-linked bonds issued in the EU.

Next steps

The regulation will be signed, and published in the EU's Official Journal before entering into force 20 days after its adoption on 23 October 2023. It will start being applicable 12 months after its entry into force.