The International Capital Markets Association (ICMA) published on 22 June 2022 its updated analysis of the proposed EU Green Bond Regulation. The Regulation will establish an official European Green Bond (EGB) label alongside the existing international market standard, represented by the Green Bond Principles (“GBP”).
ICMA supports progress towards consensus on a voluntary standard and also as regards the grandfathering of Technical Screening Criteria of the Taxonomy for the European Green Bond (EGB) label. ICMA has concerns, though, in relation to certain proposals for fundamental changes to the EGB legal requirement, which it considers will likely prove impractical and cause increased legal liability for issuers.
ICMA restates its view that the absence of a comprehensive solution to Taxonomy usability will considerably limit the potential alignment of green projects, which will also narrow the scope of the future EU Green Bond Standard (EU GBS). Its publication “Ensuring the usability of the EU Taxonomy” (February 2022) set out key usability issues including: (i) the requirement for highly granular data for technical Screening Criteria, (ii) the reliance on EU legislation and criteria in an international market, and (iii) inconsistency in the use of estimates and third-party data.
ICMA's February paper made various recommendations designed to address usability concerns:
- Allow flexibility on alignment with the "do no significant harm" principle and minimum safeguards in all cases.
- Enable technical screening criteria adaptation to non-EU jurisdictions to facilitate international usability.
- Allow estimates and third-party data based on a common methodology to assess Taxonomy-alignment.
- Simplify NACE (Classification of Economic Activities) for complex green and sustainability projects.
- Grandfather the Taxonomy alignment of the legacy green bond market for Green Asset Ratio/ Green Investment Ratio and SFDR disclosures.
The EU Parliament's proposed text of the Regulation includes mandatory incorporation of an extended factsheet into prospectuses compliant with the EU Prospectus Regulation. ICMA considers this likely to be challenging for issuers to comply with, in particular, due to the requirement for forward-looking and/or subjective statements and commitments. This in turn would result in increased costs and liability risk for issuers and act as a significant disincentive to the use of the EU GBS within the scope of the EU Prospectus Regulation.
The Parliament's text also mandates Member States to ensure that civil liability attaches to the issuer or its administrative, management or supervisory bodies for any damages incurred by investors because of infringement of use-of-proceeds or Taxonomy alignment rules. This would add considerable additional and contingent liabilities for all these parties, ICMA contends, and would create real complexity for issuers who would need to analyse and understand their potential liability across the 27 EU Member States.
The EU Council's text requires a binding provision of compliance with the EU GBS in the terms of the bond. This would mean that something outside of the control of the issuer (the example given by ICMA is future alignment of a project with the Taxonomy under a CapEx plan) could become an event of default, also triggering cross-defaults in an issuer’s other debt securities and loans (and so potentially triggering the issuer’s insolvency). ICMA believes this would create a powerful deterrent to green bond issuers' adopting the EU GBS.
The analysis also identifies some unintended barriers for CapEx plan financing contained in additional proposed requirements of the EGB Regulation:
- A CapEx plan should be capped to 2-years in case of a transitional activity. Arguably, ICMA claims, there should be more rather than less time available for the CapEx plan of a carbon-intensive issuer; the rationale of the CapEx plan mechanism was to incentivise the use of the EU GBS to finance transition.
- CapEx plans financed under the EU GBS are made subject to an annual external review, when the same CapEx plan may already be subject to annual external assurance under the upcoming Corporate Sustainability Requirements Directive (CSRD).
ICMA considers the European Parliament’s proposals to introduce mandatory requirements for all sustainable bonds to be largely superfluous, as well as raising real implementation challenges. In ICMA's view, these requirements duplicate entity-level requirements that are or will be covered by other EU sustainable finance legislation, such as the Taxonomy Regulation and the CSRD. Such duplication would diminish the appeal of the European sustainable bond market by adding unnecessary complexity and costs.
ICMA's latest analysis is a welcome contribution to the development of the green bond framework. We will continue to follow developments.