The new EU Green Bond Standard has great potential to steer investments more confidently towards sustainable technologies and businesses, according to Wilfried Bolt and Brenda Kramer (PGGM).
The new standard will enable investors to determine the actual impact of green bonds by imposing clear requirements and enforcing a strong link with the EU taxonomy. PGGM therefore welcomes the agreement reached on 28 February.
The current green bond market is governed by several different standards. This diversity in green bond frameworks has resulted in differing approaches to the way in which impact statements are drawn up, which in turn has led to a wide range of green impact scores.
This has resulted in a troubling scene for investors, who must conduct extensive screening to determine the actual impact of green bonds. Clear conditions and impact indicators as proposed in the Green Bond Standard will help reduce the current lack of clarity regarding the screening process.
In addition, PGGM is pleased with the EU GBS’ pragmatic approach towards compliance with the EU Taxonomy. We support the criterion that at least 85% of the funds raised by the bond must be allocated to economic activities that align with the EU Taxonomy Regulation, as well as the additional criterion that issuers must prove that their green bonds are in line with their climate transition plans.
PGGM has evaluated this approach in its own analysis of green bonds as this will help us reduce the information asymmetries in the green bond market.
Extension of EU taxonomy
As long as the EU taxonomy is still in development, the flexibility pocket of 15% with regards to those sectors not yet covered by the taxonomy will be important, in particular to facilitate the uptake by governmental issuers and supranational institutions. Having said that, we encourage the European Commission to ensure that the EU taxonomy, which currently focuses on climate change mitigation and climate change adaptation, be extended to include the other four environmental objectives (and possibly others), as well.
A timely extension of the eligible activities as related to biodiversity, water, waste and circularity is in our view critical to ensuring that the golden standard that is the EU Green Bonds Standard actually has an impact – provided, of course, that the criteria specified in the EU taxonomy remain science-based and in line with the Paris Climate Accords. Any watering-down of the criteria specified in the EU taxonomy would undermine the credibility of the taxonomy and consequently of the Green Bond Standard itself.
Lastly, we support the voluntary approach, as in our view financial market participants will award those issuers who act in accordance with the new standards. We expect investors to be more interested in investing in issuers whose reports comply with the EUGBS because such issuers will use standardised report formats, which will make for improved comparability.
For those issuers that do not yet meet the 85% threshold, voluntary use of EUGBS reporting standards will be a good step towards gaining or retaining investors’ trust. Investors want issuers to take up voluntary reporting for the sake of transparency, even when a bond is not (yet) in line with the 85% expenditure criterion. Recent Commerzbank research shows that this is the case for almost half the governmental green bonds issued in the eurozone.
In the EU alone, an additional €350 billion must be invested in climate adaptation every year of this decade. As an investor, PGGM would like to help meet this investment target. The Green Bond Standard as proposed will accelerate the transition through standardization and increased transparency in the green bond market. We note that, to ensure support, the taxonomy underlying the standard must be credible. This is a requirement for success. A credible sustainable finance framework will enable investors to allocate capital to sustainable activities efficiently and effectively, which will go a long way towards supporting the transition to a climate-neutral Europe by 2050.
Brenda Kramer (Senior Advisor Responsible Investment) and Wilfried Bolt (Senior Investment Manager Fixed Income) PGGM