EU Green Bonds: One Step Closer to a New Standard for Sustainable Bonds

"Green bonds"[1] have seen a steady increase in recent years, with over $500 billion in green bonds issued in 2022. However, there is some debate over whether all of these bonds were issued for activities that were in fact "green".

To prevent "greenwashing",[2] the EU Commission proposed a new regulation that creates standards for EU Green Bonds (EuGBs). On 28 February 2023, the EU Council and Parliament reached a provisional agreement on the requirements for EuGBs. Under the agreement, the proceeds of these bonds must be invested in economic activities in line with the EU Taxonomy Regulation (which provides a definition of an "environmentally sustainable investment"). The agreement allows for flexibility (for up to 15% of bond proceeds) for sectors not yet covered by the EU Taxonomy Regulation and other specified activities.

These new standards will likely play an important role in the bond market, especially because the EU Taxonomy's criteria for sustainable investments are also at the heart of non-financial reporting obligations for financial market participants and larger companies. These investors may find bond issuers that adhere to the EU's standards more appealing than other types of green bonds.[3]

Several real estate activities have already been described in detail in so-called technical screening criteria for market participants to assess whether those activities align with EU Taxonomy criteria. These activities cover both development (construction of new buildings, renovation of existing buildings) and acquisitions (and ownership of buildings).

With traditional financiers retreating, green bonds may become a (more) important source of financing in the real estate market. Developers and real estate investors may wish to build these criteria into their investment decision matrix to diversify their financing opportunities for new projects. 

[1] "A green bond is a type of fixed-income instrument that is specifically earmarked to raise money for climate and environmental projects. These bonds are typically asset-linked and backed by the issuing entity's balance sheet, so they usually carry the same credit rating as their issuers' other debt obligations."​ Investopedia.

[2] "Greenwashing is the process of conveying a false impression or misleading information about how a company's products are environmentally sound." Investopedia.

[3] For example, the ICMA Green Bond Principles which lack the mandatory nature of the EuGBs and the enforcement mechanism by way of administrative sanctions and other measures.