New EU Green Bond Standard: Strict Requirements and Limited Adoption

The European Union introduced new rules to strengthen trust in sustainable finance and combat greenwashing. By requiring issuers to meet strict environmental criteria and undergo independent verification, the framework aims to ensure that funds raised genuinely support eco-friendly projects. Industry players are now assessing the potential benefits and challenges of aligning with these guidelines.

In December 2024, the European Union Green Bond Standard (EUGBS) came into effect, introducing stringent rules aimed at combating greenwashing in the rapidly growing sustainable finance market. While the standard sets a high benchmark for sustainability-linked debt instruments, experts predict limited adoption initially due to its strict requirements.

Key Requirements

The EUGBS, which remains a voluntary standard, establishes a rigorous certification framework:

  • At least 85% of bond proceeds must be allocated to projects aligned with the EU Taxonomy;
  • Projects must adhere to the principle of "do no significant harm" to the environment;
  • Issuers are required to undergo verification by accredited reviewers approved by the European Securities and Markets Authority (ESMA);
  • Bonds claiming the label "European green bonds" must fully comply with these guidelines.

Market Reactions

Reactions from experts and organisations have been mixed. Law firm A&O Shearman predicts that early adopters will include EU sovereign states, supranational bodies, and companies with exclusively green assets. Germany’s Finance Agency and Austria’s Treasury highlighted challenges in adapting to the new rules, citing incompatibility between the EUGBS and their national frameworks. Kevin Leung, a sustainable finance analyst at the Institute for Energy Economics and Financial Analysis, believes the standard will appeal to large corporations and financial institutions already working with green assets.

Adoption Prospects

Despite challenges, the global green bond market continues to expand, with issuance reaching $560 billion in 2024. This reflects sustained investor interest, even amid local resistance to ESG investments in some regions.

The EUGBS represents a significant step in enhancing trust in the green bond market. However, its widespread adoption will require additional efforts from the EU, including advisory support and tools to ease administrative burdens. Sustainable investors and companies prepared to meet the strict requirements are likely to drive the standard’s popularity in the future.