Until now, it has been possible for just about every company: issue a ‘green’ bond and raise money to become more sustainable. What counts as green, companies and investors themselves determined in practice. But this lack of commitment must soon come to an end in Europe. The European Parliament and member states reached an agreement this week on the European Green Bond Standard, the first legal standard in the world that prescribes what a green bond must meet.
In Brussels, there was a great need for such a package of rules: the amount of green money collected by companies and governments has risen rapidly in recent years – and the fastest in Europe. Five years ago, about USD 150 billion was issued worldwide in green bonds, last year it was almost USD 500 billion. Also in the Netherlands: in recent years, for example, Philips, Tennet, de Volksbank and the state.
Two wishes come together in this market: companies need money to become more sustainable, and large investors such as pension funds want to green their portfolios. But there were no hard, unambiguous criteria for what could be called a green bond. For example, Mexico was able to raise green money to build a new airport, and Chinese parties financed green bonds for the coal industry.
The EU would like to see a lot of private money flowing to green destinations. Public money alone is not enough to combat climate change. But then those billions must go to real sustainability. The European Green Bond Standard now makes it clear what a green bond is – at least in Europe – and should thus prevent greenwashing.
The new standard should “steer growth in the right direction and ensure that it actually contributes to sustainability,” says MEP Paul Tang (PvdA), who led the negotiations on the new law. “We want to help prevent accidents, keep the cowboys out.”
Clearly what is sustainable
In short, a company must spend the majority of the money raised on activities that are included in the so-called European taxonomy. This document was presented at the beginning of last year and was supposed to put an end to all the ambiguity about what is sustainable and what is not. According to the new standard, if a company issues a green bond, 85 percent of the amount must go to activities listed in the taxonomy.
However, the taxonomy has not become an uncontroversial handbook, because gas and nuclear energy (under certain conditions) have also been included in it after a heated discussion. The document became primarily a political compromise – for the French, for example, a taxonomy without nuclear energy was unthinkable.
Is MEP Tang, who led the negotiations on the new law, disappointed that nuclear can now be labeled as green? “Yes. We fought against that in the EU and lost. The taxonomy is not perfect, but for the most part it is well put together.”
Other conditions in the new standard are that a company must report on how the money raised is spent and a mandatory external audit of this. In addition, a company must demonstrate that the money contributes to a sustainable ‘transition plan’ of the company.
There was a lot of squabbling about this last condition, says Tang, but the business community did not like it. “We wanted to avoid hanging a green flag on a brown mud barge. Now, green bonds are often issued to highlight a company’s green side jobs, without really changing anything. For example, Shell could issue a bond for a wind farm. But without a transition plan, it is not clear whether they are supporting their fossil activities with that wind farm, or are actually phasing it out.”
We wanted to avoid hanging a green flag on a brown mud barge
It is “an ambitious standard,” says Sean Kidney of the non-profit organization Climate Bonds Initiative, which is trying to mobilize private money to combat climate change. He does point out, however, that too few green bonds that are currently being issued can meet the standard, because the taxonomy has not yet been fully completed and worked out.
Another potential weakness of the new directive is that it is voluntary. Companies are still allowed to try to issue green bonds that do not meet the new standard. Nevertheless, Tang hopes that companies and governments that issue green bonds will be willing to comply.
That is quite likely, is the assessment of policy officer Martijn Bos of Eumedion, the interest group for institutional investors. “I think that as a company you are a bit surprised if you issue a green bond in Europe that is less green than this standard.”
A version of this article also appeared in the March 4, 2023 newspaper