A two or even three-speed market is the likely outcome of the European Union's finally agreed Green Bond Standard, bankers and lawyers agree.
Despite fierce efforts by the European Parliament to impose a mandatory standard on all ESG bonds issued in the EU, the GBS has ended up a voluntary standard. But it differs from the key existing voluntary standards – primarily the Green Bond Principles administered by the International Capital Market Association, but also Climate Bonds Initiative’s less prominent Climate Bonds Standard – by being “purposedly elitist”, as Natixis’s Green and Sustainable Hub researchers put it.
It is also closely linked to the EU’s taxonomy of sustainable activities, including its technical screening criteria and Do No Significant Harm provisions – though issuers are permitted a 15% “flexibility pocket” for activities the incomplete taxonomy does not cover yet.
In addition, compliant bonds must be verified by an external reviewer accredited and supervised by the European Securities and Markets Authority.
GBS-compliant issuers are likely to come primarily from EU institutions and the wider European public sector, especially as sovereigns benefit from adapted rules on eligible expenditure. But blue-chip corporates are possible too.
"It's most likely going to be some of the EU institutions and/or the European Investment Bank that are likely to be the issuers that are most keen to demonstrate that it can be used, and then it's a question of whether there are corporates in the EU with a lot of taxonomy-aligned activities who will be able to use it in reasonably short order," said Catherine Wade, counsel at Linklaters.
"We've already seen that around a sixth of issuers last year made commitments in their framework about aiming to be EU Green Bond Standard aligned and it's clear that investors would find that very helpful – certainly Article 9 funds," added Arthur Krebbers, head of sustainable finance, corporates at NatWest.
Regulations and regulators are also likely to “push” issuers of green or sustainable labelled debt to adopt the standard to avoid the appearance of greenwashing, said David Ballegeer, finance partner at Linklaters.
Even so, the taxonomy’s Euro-centricity makes it unlikely the GBS will monopolise the European market. Non-EU credits appear set to continue issuing under ICMA’s GBPs.
Issuers that manage to meet the gold standard should see a pricing benefit. "I'm sure that the EU will continue to find ways to stimulate adoption and I would expect that will translate into a pricing delta – call it a GBS greenium," Krebbers said.
This could decline over the longer term, however, cautioned Larissa de Barros Fritz, ESG and corporates strategist at ABN AMRO. “The appeal of GBS-aligned bonds will likely ease, as green bonds start covering similar transparency requirements, while having lower costs for issuers.”
The GBS permits issuers unable to meet the full standard to make optional sustainability disclosures. Accordingly, Natixis expects “a porous coexistence of different ‘pockets’ of green bonds: ICMA, CBI, full EUGBS and ‘shades of EUGBS’”.
This will crystallise an already wide range of issuer engagements. “We’ve always had a multi-speed market. It’s just that now it is more visible who is where,” said Jacob Michaelsen, head of sustainable finance advisory at Nordea. He cited “issuers that were super-excited doing top of line impact reporting and issuers that perhaps were looking to cut corners where they can”.
Additional reporting by Tessa Walsh