The European Parliament approved the adoption of a new European Green Bond (EuGB) label on October 5, 2023, aimed at combating greenwashing and providing confidence to investors that their investments are directed towards financing sustainable business activities and technologies.

On February 28, 2023, they reached an agreement to establish requirements for the European Green Bond Standard to prevent financial greenwashing. The European Commission had initially proposed the use of the term “European Green Bond” (EuGB) for environmentally sustainable bonds in July 2021. The purpose of the regulation is to determine which financial products can be classified as European Green Bonds, helping to prevent greenwashing in financial products.

Both environmental organizations like Greenpeace and international financial institutions like the International Monetary Fund had called for the establishment of standards. On February 28, 2023, EU negotiators reached a provisional agreement on rules that would enable investors to better identify bonds that align with EU green goals, and at the same time reduce the risk of greenwashing as the green bond market expands rapidly.

The regulation also establishes a framework for registering and overseeing independent referees responsible for verifying the positive environmental impact of European Green Bonds.

The rules also include a standardized template for other environmentally sustainable bonds’ issuers. According to the Commission, the template is expected to prevent common greenwashing practices in the bond market. However, it has been noted that the use of the template will be “entirely voluntary.”

Members of the European Parliament also expect the EU’s Green Bond Standard to be accepted internationally.

However, the concept of green bonds has been criticized by some NGOs like Reclaim Finance, who argue that it allows polluting companies to issue green bonds as long as the proceeds from the bond sales are used for activities within the EU Taxonomy.

Under the new standards approved by the European Parliament on October 5, 2023, companies issuing bonds under the voluntary EuGB definition will need to comply with a range of strict investment and transparency criteria. These include providing explanations of how the proceeds from the bonds will be used, reporting on how investments contribute to a green transition, and demonstrating commitment to a green transition.

The volume of green bond issuance has been increasing in recent years as both companies and governments use them to finance environmental sustainability and transition initiatives.

The rules approved by the Parliament came after an agreement on a voluntary framework for setting the EuGB standard and a separate voluntary framework for sustainability-related bonds and bonds not regulated by the EuGB definition in March 2023.

The agreed text also confirmed that all revenues within the new definition should be allocated to economic activities that are in line with the EU Taxonomy, with flexibility allowing up to 15% to be allocated to non-Taxonomy-qualifying economic activities. For sectors that have not yet established taxonomy criteria, issuers will be required to specify where these funds will be allocated.

In addition to requirements for issuers, the rules approved by the Parliament set out rules for establishing a registration system and a framework for regulating external auditors of green bonds, including the obligation to identify, address, and disclose potential conflicts of interest.

The adoption of these rules is considered a significant start for green bond issuance in the business world. Investors who are ready to invest in European Green Bonds indicate that businesses will begin to improve their work in this area from today onwards. The goal of these steps is to ensure that European Green Bonds support Europe’s transition to a sustainable economy. EU member countries and the European Parliament will have to give official approval to the regulation one year after it comes into effect.