ICMA Says Suggested EU Green Bond Rules Would Lead to Issuers Fleeing Sustainable Bond Market

Published on: 10 January 2022 07:38 PM
by KnowESG

A Brief Summary

The International Capital Markets Association (ICMA) has communicated that the proposed rules by the EU in green bonds would lead to a collapse in the leadership of EU sustainable finance. The new amendments are proposed and aimed to establish a voluntary standard for European green bonds.

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The new developments are part of a series of initiatives adopted by the commission to promote a sustainable financial system, facilitate investments in climate goals and a big step toward the EU's Green Deal goals of transforming the region into a modern, resource-efficient, and competitive economy.

The proposed green bond rules were created to aid in the financing of sustainable investments by establishing a "gold standard" for how businesses and governments can use green bonds to raise funds on capital markets while meeting stringent sustainability requirements and protecting investors from greenwashing. One of the recommendations was to demand that all funds received be directed entirely to EU Taxonomy-aligned initiatives, that complete transparency be provided through extensive reporting, and that compliance be ensured by external reviewers.

ICMA recently responded to the proposals, giving a green signal to the nature of the EuGB but warned that the compulsory EU taxonomy alignment could hinder the label's usability and uptake.

The new changes will expand the scope of the regulation and cover all types of sustainable bonds, including green, social, sustainability bonds.

Several mandatory requirements would be added to the EuGB rules as a result of the Rapporteur's changes. Incorporation of an expanded factsheet into prospectuses, Taxonomy alignment plans based on annual intermediate targets and subject to annual external reviews, and mandatory external reviews for impact reports, among other measures, would be required for EuGB-labeled issues.

According to the ICMA, the new proposals' increased cost and potential liability for issuers could have several significant negative effects on the sustainable bond market, including forcing issuers to seek financing from other markets and sources, resulting in market contraction and the loss of EU sustainable bond leadership. The ICMA also cautioned that the modifications will split the international green bond market, with the EU adhering to different standards than the international market, causing major disruption in the worldwide sustainable financing sector.