Utilizing the omnibus, potential to amplify European green bonds through increased investment and environmental financing.
"Greening up the Financial System: Navigating Simplified Taxonomy Requirements for Green Bonds"
By: A. B. Writer
Navigating the world of green bonds can be a tricky path, especially with the stringent requirements set by the Taxonomy Regulation. While the environmental objective of an activity may seem sufficient for taxonomy compliance, it isn't as straightforward as it seems. Activities must not only contribute substantially to an environmental objective and meet the technical evaluation criteria but also comply with the do-no-significant-harm principle (DNSH) and minimum social protection. Unfortunately, many companies, even those involved in renewable energy, overlook these latter requirements, making their economic activities ineligible for taxonomy compliance.
The (Almost) Unattainable "Gold Standard"
The challenges are not limited to companies. Lending banks wanting to refinance via a green bond according to the EU Green Bond Standard (EU GBS) face hurdles as well. They require the use of proceeds to finance at least 85% of taxonomy-compliant economic activities. Failure to meet taxonomy compliance results in an EU Green Bond becoming unattainable. It's no wonder that the EU GBS is often considered an almost unattainable "gold standard." So far, only two EU GBS-compliant bond issues have been recorded across Europe.
Smaller players like SMEs that deal with climate-neutral energy generation face additional challenges. Many SMEs lack an implemented supply chain due diligence process that meets the requirements of Article 18 of the Taxonomy Regulation. Adopting one requires a significant investment of both effort and resources, a deterrent for many. Consequently, the economic activities of these companies remain ineligible for taxonomy compliance, and the path to EU Green Bond financing is closed—for both the company itself and its bank.
Simplifying the Path to Compliance
Proposed reforms by the Platform on Sustainable Finance (PoSF) of the EU Commission could potentially ease the path to taxonomy compliance, particularly for SMEs. The PoSF suggests streamlining the DNSH and minimum protection tests, allowing SMEs to pass these checks simply by adhering to existing laws, avoiding activities excluded from Paris-aligned indices, and meeting the simplified entrepreneur and small and medium-sized enterprise (VSME) criteria for social standards. These requirements are manageable for many SMEs, opening the door to taxonomy compliance and access to EU Green Bond financing.
The PoSF proposals also offer relief for credit institutions. For instance, climate-neutral car loans require no proof from the borrowers; instead, manufacturers supply a central declaration. Streamlining private mortgage taxonomies using Energy Performance Certificates can significantly boost the refinancing volume of EU Green Bonds, stimulating growth in the market for green loans and bonds.
The Road Ahead
The extent of these changes hinges on the European legislator's adoption of the EU Commission's proposed Omnibus I package. While some proposals, such as simplifying "Annex C," are already partially reflected in the Commission's proposal, others have yet to be considered. Market participants can participate in the Commission's Call for Evidence on taxonomy reform until 26 March 2025, expressing their support for implementing the PoSF proposals and contributing to a greener European economy.
- To reach the "gold standard," lending banks must ensure that at least 85% of the use of proceeds finances economic activities compliant with the taxonomy regulation, as stated in the EU Green Bond Standard (EU GBS).
- SMEs involved in climate-neutral energy generation often face challenges in achieving taxonomy compliance due to the lack of a supply chain due diligence process that meets the requirements of Article 18 of the Taxonomy Regulation, a hurdle that can be addressed by the potential reforms proposed by the Platform on Sustainable Finance (PoSF) of the EU Commission.
- Simplifying the do-no-significant-harm principle (DNSH) and minimum protection tests, as suggested by the PoSF, could enable SMEs to pass these checks simply by adhering to existing laws and avoiding activities excluded from Paris-aligned indices, potentially opening the door to taxonomy compliance and access to EU Green Bond financing.
