Brussels clamps down on ‘greenwashing’ in bond market

The EU has drawn up a set of requirements to battle “greenwashing” within the bond market, step one in the direction of regulatory oversight for a fast-growing asset class that has thus far largely ruled itself.

The deal reached late on Tuesday evening between the European Fee, parliament and member states might ultimately result in a pointy discount within the quantity of debt allowed to hold a sustainable label, say analysts.

Issuance of green bonds, a category of debt whose proceeds are earmarked for climate-friendly spending, has mushroomed lately — significantly within the EU — as traders clamour for property that align with their environmental objectives. However the fast development has sparked requires elevated regulation and a typical customary, to clamp down on greenwashing, the place soiled industries increase money to fund a small a part of their actions with out altering their general environmental influence.

Solely a “minority” of the $500bn of inexperienced bonds issued final 12 months would qualify for the brand new voluntary label, Paul Tang, a leftwing Dutch MEP who led the parliament’s efforts to achieve a compromise, advised the Monetary Occasions.

“I see inexperienced bonds issued for airports in Mexico, it’s precisely what we don’t wish to have,” he stated. “With a transparent system for disclosures, any inexperienced bonds not utilizing this method will most likely be checked out with rising suspicion,” he added in a written assertion.

Mairead McGuinness, the EU’s monetary providers commissioner, described the framework as “a brand new gold customary out there to these firms that wish to be on the forefront of the sustainability transition.”

A spokesperson for the European parliament described the deal as “a brand new customary to battle greenwashing within the bond markets”.

To be labelled “inexperienced” below the brand new guidelines, 85 per cent of the funds raised by the issuance should be allotted to actions that align with the EU’s taxonomy, which defines sustainable investments throughout the bloc.

Issuers will even must disclose how these actions will assist the corporate’s overarching local weather transition plans.

The requirements are a part of a wider push by the EU to counter greenwashing. The bloc’s three monetary regulators launched a joint name for proof on greenwashing in November in a bid to crack down on inflated advertising claims. The European Fee will present further legal proposals governing client merchandise this month.

Some traders worry that compliance with the brand new guidelines will shrink the universe of securities out there to inexperienced bond funds to a tiny proportion of the general market. The taxonomy is seen by many as an unwieldy and complicated checklist discredited by its inclusion of certain gas and nuclear-related investments.

Lower than 3 per cent of worldwide financial exercise is aligned with the taxonomy, in accordance with a report final October by the EU’s Platform on Sustainable Finance.

David Ballegeer, a accomplice centered on sustainable debt on the UK legislation agency Linklaters, described the taxonomy as a “straitjacket” that may be tough for issuers to adjust to in its present kind. However the EU’s inexperienced bond label can be simpler to acquire from 2026, he stated, when all listed firms and different giant firms should begin publishing their share of taxonomy-aligned actions and investments.

EU nations had pushed for extra flexibility on alignment with the taxonomy, Tang stated. The deal on inexperienced bonds reached on Tuesday should nonetheless be authorized by member states’ ministers and the European parliament.

Sean Kidney, head of the non-profit Local weather Bonds Initiative, stated he welcomed the brand new guidelines, but additionally warned that only a few bonds would qualify for the brand new label till the EU clarifies its classification of what’s inexperienced. The taxonomy was “Eurocentric and slender” and “not match for goal in the mean time”, he stated. “No matter we do, we’ve got to make certain we construct on the success [of green bonds] and don’t kill the goose that laid the golden egg,” he added.

Within the absence of regulation, index suppliers have thus far relied on screening by teams such because the CBI to resolve what to incorporate in inexperienced bond indices. Final 12 months the CBI drew consideration to issuances it didn’t contemplate to have constructive environmental and social influence, together with a two-part $1.6bn issuance by the US utility firm Consolidated Edison, which deliberate to make use of among the money to spend money on fuel meters.

Different jurisdictions have already sought to make clear guidelines of engagement round inexperienced debt. China’s central financial institution backed the publication of voluntary requirements for inexperienced bonds final 12 months, stipulating that all the proceeds raised ought to go in the direction of tasks outlined as inexperienced in both its personal or overseas taxonomies.