Green bonds are such a central element of the sustainable finance market that it’s all too easy to take them for granted, overlooking that they are recent and significant innovations. It was barely a couple of decades ago, in 2008, that the World Bank issued the first green bond. Storebrand followed this with the groundbreaking issuance of the world’s first commercial Green Bond fund in 2015.
Things are getting shaken up again in the Green Bond market again with the recent introduction of the EU Green Bond Standard (EuGB). The standard is a voluntary framework established by the EU to enhance comparability and credibility in the green bond market. A key feature of this new standard is its close link to the EU taxonomy, as proceeds from the bond must largely be allocated to economic activities that meet the taxonomy’s criteria for environmentally sustainable activities (at least 85% taxonomy aligned).
This is an important difference compared with green bonds issued under the ICMA Green Bond Principles (GBP), which gives issuers more flexibility to define which projects and assets that could qualify as green within the framework. The EuGB, by comparison, provides a standardized definition of what qualifies as a green investment. The framework also introduces more detailed reporting requirements, pre- and post-issuance, as well as mandatory external verification.
”... A key feature of this new standard is its close link to the EU taxonomy, as proceeds from the bond must largely be allocated to economic activities that meet the taxonomy’s criteria for environmentally sustainable activities at least 85% taxonomy aligned ...”
EuGB issuance is likely to grow
We expect EuGB-labelled issuance to grow over time. Issuers are already becoming more accustomed to reporting the EU Taxonomy alignment of their green financing. In the impact and allocation reports we assess, we increasingly see issuers disclosing the share of green bond proceeds that is Taxonomy-aligned, which may also pave the way for issuing under the EuGB framework.
The Nordic market has already seen some early issuance of EuGBs. For example, in June, Storebrand invested in the first EuGB-labelled bond issued by a Swedish corporate, Vasakronan, whose green financing is primarily linked to energy-efficient buildings, followed by Hemsö which issued it’s first EU Green bond in August. In Norway, Hydro has issued an EuGB, and as the regulation is incorporated into Norwegian law, this could over time support a broader market for EuGB issuance in NOK.
Traditional green bonds will remain relevant
Does this mean that traditional green bonds are becoming less relevant? Not necessarily. ICMA-aligned green bonds are likely to remain an important part of the market, particularly for issuers and sectors with assets and projects that do not yet fully meet the requirements of the EU Taxonomy.
Financing the transition will require capital, for activities that are already fully taxonomy aligned, as well as for investments that enable issuers to move in that direction. For some sectors, especially those at an earlier stage of the transition or where the taxonomy is not yet fully applicable, the flexibility of the ICMA framework can be valuable. But this places greater responsibility on investors. Without the same degree of regulatory standardisation, investors need to assess the quality and ambition of the issuer’s green bond framework, the environmental characteristics of the underlying projects and the credibility and transparency of allocation and impact reporting.
Complementary rather than competing frameworks
We see the EU GBS and traditional green bonds as complementary, rather than competing, frameworks. The EU GBS has the potential to establish itself as a premium segment of the market, offering a higher degree of standardization and credibility. Its greatest advantage is its operational simplicity; we know that the taxonomy alignment is standardized and verified, it's easy to understand and know what you invest in.
However, if taxonomy reporting becomes more common among traditional green bond issuers, the value of the EuGB label may increasingly lie in the standardization, verification and assurance, rather than in the level of alignment alone.
Given the broader applicability of the ICMA green bonds, we expect them to continue to account for a significant share of overall green bond issuance going forward.