View from Brussels: Bond, Green Bond

The European Union is slowly but surely putting together a financial rulebook that will guide the flow of hundreds of billions of euros into the green transition in the coming years. There has been lots of progress but still some gaps remain.

Estimates vary but according to one consultancy, Europe will have to invest €28tn over the next 30 years in order to neutralise greenhouse gas emissions and achieve its ‘first climate-neutral continent’ ambitions.

Needless to say, that is a lot of money. Far more than what the public purse can afford and, currently, far more than the level of investment being made in clean energy, low-emission transport and other pollution-busting policies.

That is why it has been generally accepted that private capital is going to do most of the heavy lifting and public money is going to have to act as a catalyst or a sweetener for most clean technologies and green projects.

Enter the European Union.

This week, governments and EU lawmakers agreed on a new set of rules for green bonds, a financial instrument that offers great potential to start redirecting cash towards sustainable endeavours.

Much like food labels, there needs to be a certain amount of harmonisation on what is and what is not a green bond, otherwise there will be skullduggery afoot and investors will be sold something that is green-plated at best.

Policymakers know that if they offer investors a safe bet, they will take it. Haggling between governments over a couple of million euros in public money suddenly becomes less headache-inducing when hundreds of billions are locked up in climate-friendly bonds.

Under the new set of rules, which still need to be formally signed off later in the year, bond issuers will need to demonstrate that their offerings are aligned by the EU’s taxonomy, a separate rulebook that spells out what can qualify for a green label.

There will be a little bit of wriggle room, some 15 per cent initially, for economic activities not yet covered by the taxonomy, which is still being developed and added to by regulators.

Anyone who wants to release bonds using the European green bond standard, which is almost certainly going to become the gold-standard for investors in the coming years, will also have to agree to independent reviews to check they are up to code.

Liberal MEP Gilles Boyer said that “we are confident that this European standard will become a global reference for sustainable investments”, reiterating the EU’s aim to be a "rulemaker, not a ruletaker".

A standardised template will also be developed, although this will not be mandatory. 

Two potential shortcomings have already been identified with the set of rules. First, polluting companies will still be able to issue green bonds, so long as the proceeds are spent according to the rules. 

This will not affect the company’s right to spend other lines of revenue on activities that are not climate-friendly. Finance NGOs warn that this could allow big oil and gas majors to engage in more greenwashing than they already do.

Secondly, the bond codex is closely aligned with the taxonomy, which itself has not been immune from controversy. Legal action has already been launched and threatened from various quarters over its criteria.

According to the current iteration, gas and nuclear power are eligible for a green label under certain circumstances. France and Germany teamed up last year to force through those mutually beneficial provisos in a deal widely seen as a carve-up.

Environmental NGOs and even anti-nuclear nation Austria are taking the European Commission to court, alleging that the EU’s executive branch overplayed its hand and exceeded its powers in including those energy technologies.

Those lawsuits will take years to make their way through the labyrinthine EU legal system, souring investor appetite no matter what the eventual outcome proves to be.

There are also plans in motion to include certain aviation technologies in the rulebook, which would be aimed at phasing out the most polluting planes in favour of ultra-efficient new aircraft. That too has been branded as greenwashing by climate groups.

Beyond the green bonds and the taxonomy, there are also new rules for the nascent hydrogen industry that still need to be approved. 

The Commission published its decision on what should be classed as green hydrogen last month, spelling out a list of criteria that will govern what needs to be done during production to qualify.

Praise and criticism were levied in equal measure, with industry players and some environmental groups welcoming the long-delayed framework that should allow the sector to start ramping up and investments to be made.

But certain criteria such as an allowance for some green hydrogen to be produced using fossil fuels when there is no renewable energy available have ruffled some feathers.

Members of the European Parliament and the Council have around a month to object to the rules before they become law. A majority of MEPs or a more complex qualified majority of governments would need to reject it.

All in all, a green path for cash is slowly being hacked through the murky jungle of bad bets. Some might not like how rough the going is but it is undoubtedly progress and tangible results should be incoming soon.

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