The EU’s sustainable finance advisers have called for green bonds to retain their ‘taxonomy-aligned’ status even if their use-of-proceeds is no longer aligned with the bloc’s environmental ambitions, to avoid spooking investors.
The Platform on Sustainable Finance, which has advised the European Commission on its green finance agenda for the past two years, concluded its mandate on Tuesday by publishing its final guidance.
Through two reports, the Platform offers advice on the EU’s requirements on Minimum Social Safeguards and on how the taxonomy can be made more practical for companies and investors.
Among the recommendations, it asked the Commission to ‘grandfather’ green debt under the taxonomy.
“Grandfathering is a provision by which an old rule continues to apply to specific existing situations while a new rule will apply to all future cases,” the report explained.
Every three years, the taxonomy’s climate transition ambitions will tighten in line with the EU’s commitment to become climate neutral by 2050. But investors fear this process will mean some green debt will only be taxonomy-aligned for three years before falling foul of new standards, creating reputational risks for bondholders and lenders and driving prices down on the secondary market.
To avoid this, the Commission is being asked to “consider the necessary legislative amendments to implement grandfathering” in a way that would safeguard the green credentials of deals regardless of changes to the taxonomy.
This would apply to any form of debt issued in line with the taxonomy, including green bonds and loans. However the Platform recommends that deals that finance transitional activities (those seen as stepping stones to decarbonisation) should only be protected for 10 years.
The reports also suggested that the EU should create climate pathways against which companies can issue transition bonds.
“The Platform recommends the European Commission considers working towards defining 1.5°C trajectories (67% probability of reaching 1.5°C) with no or limited overshoot to the extent possible, based on science. For transitional activities, it should include clear time frames and pathways on how their criteria will tighten and when their status as a transitional activity expires (sunset clauses) wherever possible,” the report said.
An official EU Green Bonds Standard label is currently being negotiated by Europe’s lawmakers.
The European Commission this week launched a call for applications to its next advisory body, which will replace the Platform.
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