Hogan Lovells - Proposal for a European Regulation on Green Bonds

On 6^th July 2021 the EU Commission published the legislative proposal for the establishment of a European Green Bond Regulation (the "EU GB"), which lays the foundations for a common framework of rules for issuers wishing to use the designation "European Green Bonds" or "EuGBs" in relation to issues whose proceeds are used to finance environmentally sustainable activities or projects under the EU Taxonomy Regulation 852/2020 (the "Taxonomy Regulation").

According to the Commission, the existing standards for green bond issuances - based on principles and high level guidelines or recommendations, as the Green Bond Principles developed by the ICMA - do not provide sufficiently standardised, rigorous and comprehensive definitions of the projects to which the proceeds of an issuance are allocated and do not ensure adequate transparency and accountability of external auditors.

The main objectives of the EU GBS are to: (i) support investors in the identification and reliability of the quality of green bonds; (ii) facilitate the issuance of higher quality green bonds; and (iii) standardise external audit activities and improving the reliability of external auditors.

The EU GBS  is addressed to all issuers, both public and private, who voluntarily intend to tag their green bond issues as "European green bonds" or "EuGB" (including issuers of covered bonds and asset-backed securities).

The most relevant provisions relate to the following:

(i)  Use of income and alignment with taxonomy

The proceeds from the issuance of an EuGB shall be used exclusively and fully, and without any deduction of costs, to finance or refinance certain eligible assets specified in the EU GBS that must meet the requirements of the Taxonomy Regulation (either upon issuance or over a period of 5 years and according to a taxonomy alignment schedule).

(ii)  Factsheet and external review

Prior to the issue of an EuGB, issuers will be required to prepare a factsheet – on the basis of a template annexed to the EU GBS - describing, inter alia, how the proceeds of the issuance will be used and the activities that will be financed. The factsheet will be subject to audit by an external auditor that will verify its compliance with the requirements of the EU GBS.

Although structurally different, the factsheet will be replacing the green bond framework currently published in accordance with ICMA Green Bond Principles.

(iii)  Allocation report and external post-issuance review

Until the proceeds of the issue have been fully allocated, EuGB issuers will be required to prepare annually an allocation report in order to provide an indication of the use of the proceeds and demonstrate that the proceeds have been used in accordance with the requirements of the EU GBS. Such report must also be reviewed by an external auditor to confirm that it meets the requirements of the EU GBS.

(iv)  Requirements for external auditors and ESMA register

ESMA registration and ongoing supervision of external auditors is envisaged. External auditors will have to meet certain requirements - relating to organisation, internal processes, governance - in order to be registered in ESMA's register. The legislative proposal also set out detailed rules for pre-issuance and post-issuance review.

(v)  Environmental impact report

Once the allocation of proceeds of the issuance has been completed, EuGB issuers will have to prepare a report – on the basis of a template annexed to the EU GBS - on the environmental impact of the use of proceeds.

The publication of the legislative proposal by the Commission is the first step in the legislative process for the adoption of a European regulation on green bonds and the expectation is that the new regulation will enter into force not earlier than the beginning of 2023.

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