The sustainability funding team at the EIB had already tuned its CAB documentation to the EU Sustainable Taxonomy on Climate (EUSTC) in April 2019 but used the new €1bn November 2035 bond issue to announce the first series of extensions of CAB eligibilities. Lending in the project areas of research, development and deployment of low carbon technologies and to electric rail infrastructure and rolling stock, and electric buses can now be allocated from proceeds from the new CABs.
It’s the culmination of years of consistent messaging and action, says Aldo M. Romani, head of sustainability funding at EIB in Luxembourg. “We anticipated the taxonomy at a very early stage and we have taken this anticipation forward, not only vis-à-vis the market but also internally,” he notes.
The original eligibilities for CABs were established in 2007 when the hot topic was the EU’s Energy Action Plan focused on renewable energy and energy efficiency. “That didn’t change for over a decade largely because of the absence of an objective institutional and official way to classify and measure contributions to sustainability,” says Romani. “There are areas of controversy as to what is green what is not, what is contributing and what is not. At the bank, this decision is not made in the finance directorate but in the projects directorate.
“This is the value of the taxonomy. It creates a shared compromise — a consensus that has an authority that no decision could that is made at the level of the individual intermediary, lender, issuer or investor.”
Dominika Rosolowska, sustainability funding officer at the EIB, says that this certainty will not only help issuers avoid the controversies that sometimes occur around the green bond use-of-proceeds definitions. “The clarity that is provided by the taxonomy with regard to core features of sustainability should prevent these cases happening, while through the tool of the EU Green Bond Standard (GBS) the role of the external review providers will too be standardised — in the sense that they will be verifying the alignment of the issuer’s green bond framework with the taxonomy itself,” she says. “It will provide certainty on core aspects not only to issuers but also to other market actors including external reviewers.”
Thinking ahead
“In CABs we only have one objective which is climate change mitigation and that is covered by the taxonomy proposal that has already been published by TEG [the European Commission’s Technical Expert Group on Sustainable Finance], currently under review for adoption of an official EU taxonomy for climate at the end of this year. But for environmental objectives beyond climate, technical screening criteria will only be ready next year for implementation from the end of 2022. Social sustainability is likely to be tackled at an even later stage.
“We cannot wait until then. So the bank needs to put in place its own technical screening criteria that are structured to follow the logic of the taxonomy but standing on their own, based on EIB’s project expertise and lending practice.”
The bank adopted new documentation for the first SAB in 2018, linking to the evolving EU legislation on sustainable finance. Again, EIB’s work in this area has anticipated the adoption of the EU Green Bond Standard which, in the absence of a published taxonomy under the stated environmental objectives, will allow issuers to define the technical criteria under which they significantly contribute to such objectives.
In the area of social sustainability it is more difficult still as not even the objectives are yet defined. At the end of 2019, EIB extended the eligibilities for SABs to include education and health, contributing to objectives in line with United Nations Sustainable Development Goals (SDGs). As it turns out, the Covid-19 pandemic exceeded some of the SAB eligibility criteria originally put in place by the funding team’s colleagues in the projects directorate. The EIB has, for instance, provided financing to hospital projects as part of its pandemic response, but some countries were not considered eligible for SAB allocation under the initial criteria.
However, the adaptability of the approach allowed EIB to continue to use the SAB banner to raise funding for its Covid-19 response.
“We continue to use the franchise and the approach we have taken is also going to shed light on the activities that the bank is going to undertake as a response to the sanitary crisis via transparent and accountable extension of SAB eligibilities,” says Romani. “This is very different to just putting a new name or label in the market.”
Team effort
Since inception, the team has issued the euro equivalent of €7.2bn of CABs via 22 transactions in 13 currencies, and €3.8bn of SABs via nine transactions in euros and Swedish krona. But its achievements go beyond issuance, and even pre-date the establishment of the team. Indeed, the roots of the taxonomy can be traced to the joint EIB-China Green Finance Committee white paper in 2017 that fed into EIB’s classification proposal that directly fed into Commission’s proposal for Taxonomy Regulation in May 2018. It also contributed to the Green Bond Principles working group on project eligibility that delivered a clearer separation between objectives and eligible activities that is such an important part of the taxonomy.
The internal work of the team raised awareness within the bank of how the Commission’s approach to linking sustainable finance and the real economy through the taxonomy made it relevant not just for the funding activities of the bank, but also for its lending activities.
“The taxonomy breaks the barrier between financial products by focusing attention on the sustainability analysis of the economic activities that are financed by whatever financial product you may want to consider,” says Romani. “The approach EIB is taking is a transformational approach that is mobilising the whole bank now that the political decision has been made and necessary legislative steps are being realised.”
Now that the groundwork has been completed and the taxonomy is enshrined in EU law, the team is looking forward to building on the foundations. The enthusiasm of the team in working on the task in hand highlights that the value of the taxonomy regulation goes beyond the taxonomy itself, says Romani. “It’s an enabling framework that allows individuals to act on, to take the initiative, because they now have the taxonomy as a reference.”
