The European Securities and Markets Authority (ESMA) noted a “remarkable development” in the green bond market in a paper last week.
The supervisor’s latest report on trends, risks and vulnerabilities points out that, while “lower momentum in ESG investing signals a reduced investor appetite for ‘green’ investment products”, there is one exception to the slowdown.
“The ESG bond markets continued to grow, with the total value of European Union ESG bonds outstanding up 17% in 2024,” the report noted.
“Green bond market strength has been underpinned in recent years by non-financial corporate issuance, a remarkable development for a market originally driven by supranational and sovereign issuance, sending positive signals about the greening of the European economy.”
A day later, on Friday, ESMA unveiled its final technical rules for companies wanting to verify bonds using the EU’s official Green Bond Standard (EU GBS).
There have only been two labelled EU green bonds since the standard was launched in December – one from French government body Île-de-France Mobilités, and another from Italian utility A2A.
Mireille Martini, a senior adviser on sustainable finance regulation for the Climate Bonds Initiative (CBI), has said the EU should encourage uptake of the EU GBS by broadening the range of assets permitted under the label.
The GBS is based on the EU Taxonomy, meaning a qualifying bond must allocate 85% of its proceeds to economic activities that align with the green framework.
“The problem is that the Taxonomy doesn’t work well for multinational companies,” says Martini.
That is because the regulation says that, wherever an activity is conducted in the world, it must comply with EU standards and rules.
“So if I am a company operating green buildings in North America, I can’t count them under the taxonomy because they won’t adhere to European energy efficiency standards,” Martini says.
“Or, if I run biomass to a high standard in Brazil, I can’t count it because the ‘Do No Significant Harm’ rules are defined by EU law, and there is no equivalency permitted.”
CBI wants the European Commission to address this as part of its upcoming revision of the Taxonomy Regulation, which is scheduled to be outlined as part of a broader ‘omnibus’ legislative proposal next week.
The NGO wants the law changed to make it easier for projects outside Europe to qualify for the Taxonomy – if they comply with suitable local laws or voluntary standards – and therefore the EU Green Bond Standard (GBS).
It also thinks a greater number of business activities associated with the climate transition should be added to the Taxonomy, for the same purpose. Currently, the framework focuses heavily on activities that are already green.
ESMA guidelines
Green bond investors have already had some welcome news from European policymakers recently.
ESMA released its fund-naming guidelines last year, which lay out its expectations for how investment managers should use words like ‘green’ and ‘sustainable’ in the titles of funds, to prevent greenwashing when marketing to clients.
Originally, those guidelines prohibited investors from calling a fund ‘green’ if it holds securities from companies that generate more than half their revenues from gas, 10% from oil, or 1% from coal.
“That’s a problem for investors wanting to use green bonds to finance the [climate] transition,” said Pietro Sette, a director at investment advisor firm MainStreet Partners.
The exclusions, based on the EU’s Paris-Aligned Benchmark (PAB) regulation, rule out a lot of utilities and energy companies – some of which are major issuers of green bonds as they pivot towards cleaner sources of energy.
In December, after lobbying from the green bond industry, ESMA refined its guidelines to suggest investors “should” evaluate the greenness of a bond’s use of proceeds, rather than its issuer.
The supervisor does not explain how PAB exclusions can be applied in this context – how to screen projects or activities, instead of entities – but Sette says “the consensus in the market is that those percentages are gone”.
For green bonds, “a blanket approach” will now be the norm: an investor simply cannot finance fossil fuels through their bond portfolios.
As per the PAB rules, ESMA’s fund naming guidelines also contain exclusions for companies that breach the UN Global Compact. Those screens must still be applied at issuer level for green bond funds under the revision.
Complying will require more data, Sette said, and could put managers in “a tricky position” if they do not currently track where the proceeds of their underlying green bond portfolios are being allocated.
“But generally the new guidelines are seen very positively,” he added.
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