The Paris Agreement, signed by 195 countries in December 2015 at the Paris Climate Conference (COP21), aims to promote private investment in the ‘green economy.’ It aims to ‘strengthen the global response to the threat of climate change’ by making financial flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development’. It is foreseen that the private sector will have a crucial role to play. The proposal for a European Green Deal adopted by the European Commission on 11 December 2019 recognizes that ‘the private sector will be key to financing the green transition’ and that ‘long-term signals are needed to direct financially, and capital flows towards green investment and avoid stranded assets.
As green finance is becoming more and more central in finance, we need a clear definition of what it means. The terms ‘green loans’ and ‘green bonds’ refer to loans and capital market instruments issued to finance projects positively impacting the environment (‘green projects’). It is worth noting that European and international law does not give us a uniform and binding definition of green loans and green bonds. The initiatives promoted by public or private bodies in this sector have produced mere ‘recommendations’ and ‘guidelines’ to be adopted voluntarily: the Green Bond Principles (GBPs), developed by the International Capital Market Association (ICMA), are certainly the most important voluntary process guidelines related to the issuance of green bonds. In addition, the Taxonomy Regulation (proposal COM/2018/353 final) should enter into force, setting up a binding and unified classification system for sustainable activities, and enabling the development of future EU policies supporting sustainable finance. The European Union is in the process of establishing a framework for green finance. The first step towards this goal was made in March 2018, when the European Commission adopted a comprehensive plan to promote sustainable finance (the ‘Action Plan on sustainable finance’) and set up the Technical Expert Group on Sustainable Finance (TEG), which developed the EU Green Bond Standard.
Green Bond Principles
The GBPs are still voluntary guidelines for the issuance of green bonds. According to the GBPs, green bonds are any type of bond instrument where the proceeds will be exclusively applied to finance or re-finance, in part or in whole, to new and/or existing eligible green projects and which are aligned with the four core components of the GBPs:
• use of proceeds;
• process for project evaluation and selection;
• management of proceeds; and
• reporting.
EU Green Bond Standard
In line with the approach outlined in the Action Plan on sustainable finance, the TEG has drawn up an EU Green Bond Standard for the issuance of European green bonds (the ‘EU standard’). The EU standard defines the EU Green Bond as any type of bond instrument meeting the following requirements: • the issuer shall provide the EU Green Bond Framework, a document through which, among others, the issuer confirms the adoption of, and the compliance with, the EU standard (also with the support of an accredited verifier) and describes the EU green project as well as the environmental objectives to be achieved through the investment; • the proceeds shall be used exclusively to finance or refinance, in whole or in part, new and/or existing EU green projects; and • the alignment of the bond with the EU standard shall be assessed by an accredited verifier appointed by the issuer.
The Taxonomy Regulation
The Taxonomy Regulation establishes a legal framework for a harmonised and unified classification system for sustainable activities in the EU. An economic activity shall be considered environmentally sustainable when it complies with the following four criteria: • Substantially contribute criterion • No significant harm criterion • Minimum safeguard criterion • Technical screening criterion • The Regulation also defines its scope of application. Indeed, the Regulation shall apply to: • financial market participants making available financial products, as defined in Regulation (EU) 2019/2088 (the Disclosure Regulation). Information about the sustainability of the investment relating to the product offered shall be provided in pre-contractual information and periodic reports; • undertakings subject to Directive 2014/95/EU on non-financial reporting must provide additional information about the sustainability of their activities; and • measures adopted by Member States or by the EU setting out any requirements on financial market participants or issuers in respect of financial products or corporate bonds that are made available as environmentally sustainable.
Source: https://www.ibanet.org/article/f43b78f6-59d7-4b29-a332-e10ccc9ff0be
