Towards a European Green Bond: A Commission’s Proposal to Promote Sustainable Finance

Abstract

The green bond market has demonstrated a significant expansion over the previous years. Nonetheless, it remains only a very small fraction of the overall bond market. Further growth in the green bond market would provide significant green investment, thereby helping to close the European Green Deal investment gap and achieve the EU’s environmental objectives. In July 2021, the European Commission adopted a legislative proposal for the introduction of a European Green Bond Standard seeking to promote sustainable finance by making it easier for market participants to raise large-scale financing for climate and environmentally-friendly investments.
The Commission’s proposal aspires to set a new benchmark for green bonds through the standardization of market practices and the introduction of high standards both for issuers and external reviewers. In this context, it sets out i) a framework of rules for bonds that pursue environmentally sustainable objectives, as per the Taxonomy Regulation, and ii) a system for the registration and supervision of external reviewers. The Commission’s proposal aims to address the existing deficiencies in the green bond market, namely the lack of a uniform framework regarding the definitions of green assets/projects, the disclosure requirements and the performance of external reviews. To this end, it links the allocation of proceeds from a European Green Bond to the EU Taxonomy, introduces enhanced disclosures for issuers based on standardized templates and requires external reviewers to be registered with and supervised by the European Securities and Markets Authority (ESMA).

Keywords: Green bond, sustainable finance, green finance, ESG, EU Taxonomy, European Green Deal

JEL Classification: G15, G18, G21, G28, K23